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Chapter 9

Week 6 - Chapter 9.docx

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York University
ECON 2000

Week 6Chapter 9Introduction to Economic Fluctuations Canadas GDP growth averages around 31 per year over long run but has large fluctuations in the short runWhen there is falling output and rising unemployment economy said to be in recessionOkuns Lawthe negative relationship between GDP and unemploymentoAs GDP falls unemployment rises and vice versaConsumption and investment fluctuate with GDP but consumption tends to be less volatile and investment more volatile than GDPOne of most important drivers of fluctuations in Canadian economy is existence of volatility in the United StatesoWe export significant fraction of output to Americans and when they stop buying Canadian goods many firms in Canada need to cut productionEconomists call these fluctuations in output and employment the business cycleMany economists particularly those working in business and govt are engaged in task of forecasting shortrun fluctuations in economyoBusiness economists interested in forecasting to help their companies plan for changes in economic environmentoGovt economists interested in forecasting for two reasonsEconomic environment affects govtie state of economy influences tax revGovt can affect economy through choices of monetary and fiscal policyeconomy forecasting therefore an input into policy planningOne way economists determine forecasts is by looking at leading indicatorsoVariables that tend to fluctuate in advance of overall economyForecasts differ in part because economists opinions differ in terms of which leading indicators are the most reliableSome of the most used leading indicators areoNew orders inventory levels the number of new building permits issued stock market indexes money supply data the spread between shortterm and longterm interest rates and consumer confidence surveys91 TIME HORIZIONS IN MACROECONOMICSHow the Short Run and the Long Run DifferKey difference between the short run and the long run is the behaviour of pricesoIn the long run prices are flexible and can respond to changes in supply or demandoIn the short run prices are sticky at some predetermined levelSince prices behave differently in short run than in long run economic policies have different effects over different time horizonsFor example if Bank of Canada reduces money supply by 5 percentoLongrun prices are reduced by 5 real variables stay the samemonetary neutralityoShortrun prices there is little immediate change in many pricesprices are sticky
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