Week 10 chapter notes

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University of Toronto Scarborough
Economics for Management Studies
Jack Parkinson

Chapter 9 Introduction to Economic Fluctuations Notes N one way that economists arrive at their forecasts is by looking at leading indicators, which are variables that tend to fluctuate in advance of the overall economy and that are used differently by each economist N some of the most used leading indicators are new orders, inventory levels, number of new building permits issued, stock market indexes, money supply data, the spread between short-term and long-term interest rates, and consumer confidence surveys N these data are often used to forecast changes in economic activity about 6 to 9 months into the future 9.1 Time Horizons in Macroeconomics How the Short run and the Long Run Differ N in the long run, prices are flexible and can respond to changes in supply and demand N in the short run, many prices are sticky at some predetermined level N because prices behave differently in the SR than in the LR, economic policies have different effects over different time horizons N in the short run, many prices do not respond to changes in monetary policy N this SR price stickiness implies that the SR impact of a change in the money supply is not the same as the LR impact N during the time horizon over which prices are sticky, the classical dichotomy no longer holds: nominal variables can influence real variables, and the economy can deviate from the equilibrium predicted by the classical model The Model of Aggregate Supply and Aggregate Demand N in classical macroeconomic theory, the amount of output depends on the economys ability to supply goods and services, which in turn depends on the supplies of capital and labour and on the available production technology N the theory posits that prices adjust to ensure that the quantity of output demanded equals the quantity supplied N when prices are fixed, output also depends on the demand for goods and services N demand, in turn, is influenced by monetary policy, fiscal policy, and various other factors N because monetary and fiscal policy can influence the economys output over the time horizon when prices are sticky, price stickiness provides a rationale for why these policies may be useful in stabilizing the economy in the short run 9.2 Aggregate Demand N aggregate demand (AD) the negative relationship between the price level and the aggregate quantity of output demanded that arises from the interaction between the goods market and the money market The Quantity Equation as Aggregate Demand d N M P = (M P) = kY where k = 1V is a parameter determining how much money people want to hold for edery dollar of income N quantity equation states that supply of real money balances MP equals demand (MP)and demand is proportional
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