ECO 1104 Lecture Notes - Lecture 14: Menu Cost, Market Failure, Exchange Rate

• School: University of Ottawa
• Department: Economics
• Course: ECO 1104
• Professor: Gordon Lenjosek

Document Summary

In the short run, gdp fluctuates around its trend: expansions periods of rising real gdp and falling unemployment, recession periods of falling real incomes and rising unemployment, depressions severe recessions. Short run economic fluctuations are often called business cycles. Recessions defined as two or more consecutive quarters of falling real gdp are marked on graphs with vertical bars. Other macro variables fall too: incomes, consumer spending, sales, profits, tax revenue, stock prices, imports. During each recession, the unemployment rate rises: when firms cut back on production, they don"t need as many workers. Similarly, during expansions, the unemployment rate falls: as firms increase output, they need more workers. Explaining these fluctuations is hard and the theory of economic fluctuations is controversial. Most economists use the model of ad and as to study economic fluctuations. This model differs from the classical economic theories economists use to explain the long run.