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Chapter 3

Chapter 3 Notes

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Economics 2152A/B
Philip King

Chapter 3 Trend-cycle decomposition of macroeconomic variable  Trend component o More important regarding economic growth  Cyclical component (deviation from trend) o More important regarding business cycles o Has a zero mean, and when plotted against time, has a horizontal slope on average. o Individual features:  Variability: Measured by the standard deviation of its cyclical component, which is often expressed relative to the standard deviation of real GDP  Persistence: A macroeconomic variable is persistent if a positive deviation from trend is typically followed by a positive deviation.  A variable is: o Pro-cyclical if:  It tends to be above trend when GDP is above trend  It tends to be below trend when GDP is below trend  Correlation must be between 0.2 and 1 o Counter-cyclical if:  It tends to be below trend when real GDP is above trend  It tends to be above trend when real GDP is
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