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Chapter 12 Short Run Economic Fluctuations (97% in the course

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ECON 2035
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Chapter 12ShortRun Economic Fluctuations121 THE BUSINESS CYCLE BusinessCycleShortrunyeartoyearfluctuationsinaneconomysoutputandunemploymentAggregateExpenditurePhilipscureAEPCmodeltheoryofshortruneconomicfluctuationsthatassumesanegativerelationshipbetweentheinterestrateandoutputtheAEcurveandapositiverelationshipbetweenoutputandinflationthePhilipscurveUnemploymentrateUpercentageofthelaborforcewithoutjobsrelatedtooutputmovetogetherPotential Output Y the normal or average level of output as determined by resources and technology StahlsdefOutputisconsistentwithusingallresourcesasefficientlyaspossibleinasustainablemannerMosteconomistgrowthrate3currentlyDoes not mean the that the potential level of output is the max amount of output that can be producedWorkers work longer hours and plants and equipment are used for longer hours than output can be higher than potential NaturalRateofUnemploymentU normal or average level of unemployment consistentwithpotentialoutput Mosteconomistgrowthrate5currentlydoes not mean that the unemployment rate is 0 always a number of people inbetween jobs at any given time thus there will be a positive unemployment rate when unemployment is at normal levels US natural rate of unemployment risen in the late 60s and 70s and to have fallen in the 90s Factors contributed to unemployment 1Distribution of the age of population 60s and 70s baby boomers were entering the workforce younger workers had the highest unemployment rate 2Productivity growth related to the cost of labor70s slowed increased labor costs led to firms hiring more workers natural rate of unemployment declined ActualoutputfluctuateerraticallyfromyeartoyearActualoutputpotentialoutputEconomicBoomoEconomicboomperiodwhenactualoutputexceedspotentialoutputOutputpotentialoutputeconomicrecessionoRecessionperiodwhenactualoutputfallsbelowpotentialoutputOutputgappercentagedifferencebetweenactualandpotentialoutputoYYYPOSITIVEBOOMNEGATIVERECESSIONBusiness Cycle Fluctuation Recession unemployment rate is higher than natural rate of employment Booms unemployment rate is lower than natural rate of employment Level of output rises the unemployment rate will fall and when the level of output falls the unemployment rate will rise OkunsLawrelationbetweenoutputandunemploymentoverthebusinesscycletheoutputgapfallsby2percentagepointswhenunemploymentrisesonepointabovethenaturalrateforeach1riseinunemploymentratetheoutputgapwillriseby2YYY2UUoEx210510outputgap10AggregateExpenditureAEtotalspendingonaneconomysgoodsandservicesbypeoplefirmsandgovernmentsaggregatespendinginaneconomySpendingincreaseoutputincreasesRecessions and booms are caused by fluctuations in total spending in the economy AE increasesspending increases oFirms sales will increase leading them to want to hire more workers and produce moreoutput will increase and unemployment will decreasevise versa when AE decreases
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