ECN 301 Chapter Notes - Chapter 8: Real Interest Rate, Nominal Rigidity, Loanable Funds

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Over the past decade real gdp has grown at an average rate of 3. 1%. At the same time unemployment has fluctuated around and average level consistent with stable inflation a natural rate of unemployment of 7. 5%. Fluctuations in growth are called business cycles. Business cycles have two phases; boom phase and depression phase. Sticky prices they will not move freely and instantaneously in response to changes in demand and supply. Instead prices will remain fixed at predetermined level as businesses expand or contract production in response to changes in demand and costs. The first consequence of co(cid:374)su(cid:373)er"s (cid:272)utti(cid:374)g (cid:271)a(cid:272)k their spe(cid:374)di(cid:374)g (cid:449)ill (cid:271)e a fall i(cid:374) the aggregate demand for goods. Consumer spending has fallen yet nothing happened to flow of spending on investment goods, net exports and government purchases. As businesses see spending on their products begin to fall, they will not cut their nominal prices.

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