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Lecture 12

ECON 1BB3 Lecture Notes - Lecture 12: Business Cycle, Price Level

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Bridget O' Shaughnessy

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What are business cycles and what causes them?
Business Cycles
- Economic fluctuations are irregular and unpredictable
- Economic variables fluctuate together
- If GDP increases, unemployment decreases and vice versa
Stylized Business Cycle
- Peak and trough
- Trough to peak expansion (boom)
- Peak to trough recession
o2 consecutive quarters (6 months) of declining GDP is considered a recession
AD: Y = C + I + G + NX
LRAS: Y = A * F (K, L, H, N)
SRAS: Y = Ŷ + a (P – Pe)
- The model is in equilibrium at the intersection of AD and SRAS
- If this point also coincides with the LRAS curve, then the economy is in the long run equilibrium (when all
curves intersect at one point)
- If Y>Ŷ, the economy is in a boom
- If Y<Ŷ, the economy is in a recession
AD Shock
-Positive net export shock
oUS finally comes roaring out of their recession
oCandian exports increase
oPrice level increases
oGDP increases
oUnemployment decreases
-Negative supply shock
oPrice of oil increases
oHigh inflation
oHigh unemployment
This is called STAGFLATION
Stagnant employment and inflation
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