ECON 261 Chapter Notes - Chapter 20: Classical Dichotomy, Aggregate Supply, Neutrality Of Money

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Three key facts about economic fluctuations: fact 1: economic fluctuations are irregular and unpredictable, fluctuations in the economy are often called the business cycle. As this term suggests, economic fluctuations correspond to changes in business conditions: the term business cycle is somewhat misleading because it suggests that economic fluctuations follow a regular, predictable pattern. Most macroeconomic variables that measure some type of income, spending, or production fluctuate closely together. When real gdp falls in a recession, so do personal income, corporate profits, consumer spending, investment spending, industrial production, retail sales, home sales, auto sales, and so on. In other words, when real gdp declines, the rate of unemployment rises. When firms choose to produce a smaller quantity of goods and services, they lay off workers, expanding the pool of unemployed: in each of the recessions, the unemployment rate rises substantially.

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