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ECN204 Chapter 14.doc

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Ryerson University
ECN 204
Christos Shiamptanis

ECN204Chapter 14Three Facts About Economic FluctuationsoFact 1 Economic fluctuations are irregular and unpredictableoFact 2 Most macroeconomic quantities fluctuate togetheroFact 3 As output falls unemployment risesClassical EconomiesA RecapoThe previous chapters are based on the ideas of classical economies especiallyThe Classical Dichotomy the separation of variables into two groupsRealquantities relative pricesNominalmeasured in terms of moneyThe Neutrality of Money changes in the money supply affect nominal but not real variablesoMost economists believe classical theory describes the world in the long run but not the short runoIn the short run changes in nominal variables like the money supply or P can affect real variables like Y or the urateoTo study the shortrun we use a new modelThe Basic Model of Aggregate Demand and Aggregate SupplyoEconomists use the model of aggregate demand and aggregate supply to explain shortrun fluctuations in economic activity around its longrun trendThe aggregate demand curve shows the quantity of goods and services that households firms and the government want to buy at each price levelThe aggregate supply curve shows the quantity of goods and services that firms choose to produce and sell at each price leveloThe model determines the equilibrium price level and equilibrium output real GDPThe Aggregate Demand CurveoThe AD Curve shows the quantity of all goods and services demanded in the economy at any given price levelWhy The AD Curve Slopes DownwardoYCIGNXoAssume G is fixed by government policyoTo understand the slope of AD must determine how a change in P affects C I and NXThe Wealth Effect P and CoSuppose P risesThe dollars people how buy fewer goods and services so real wealth is lowerPeople feel poorerResult C fallsThe InterestRate Effect P and IoSuppose P risesBuying goods and services requires more dollars
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