ECN 204 Lecture Notes - Market Failure, Nominal Rigidity, Menu Cost
1 May 2012
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Document Summary
Over the long run, real gdp grows about 2% per year on average. In the short run, gdp fluctuates around its trend. Recessions: periods of falling real incomes and rising unemployment. Short-run economic fluctuations are often called business cycles. Explaining these fluctuations is difficult, and the theory of economic fluctuations is controversial. Most economists use the model of aggregate demand and aggregate supply to study fluctuations. This model differs from the classical economic theories economists use to explain the long run. Most economists believe classical theory describes the world in the long run, but not the short run. In the short run, changes in nominal variables (like the money supply or p ) can affect real variables (like. To study the short run, we use a new model. Economists use the model of aggregate demand and aggregate supply to explain short-run fluctuations in economic activity around its long-run trend.
