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1、MACROECONOMICS 2010 Worth Publishers, all rights reserved 2010 Worth Publishers, all rights reservedS E V E N T H E D I T I O NPowerPoint Slides by Ron CronovichN. Gregory MankiwC H A P T E RIntroduction to Economic Fluctuations9Modified for EC 204 by Bob MurphyIn this chapter, you will learn:facts
2、about the business cyclehow the short run differs from the long runan introduction to aggregate demandan introduction to aggregate supply in the short run and long runhow the model of aggregate demand and aggregate supply can be used to analyze the short-run and long-run effects of “shocks.”3CHAPTER
3、 9 Introduction to Economic FluctuationsFacts about the business cycleGDP growth averages 33.5 percent per year over the long run with large fluctuations in the short run.Consumption and investment fluctuate with GDP, but consumption tends to be less volatile and investment more volatile than GDP. U
4、nemployment rises during recessions and falls during expansions. Okuns Law: the negative relationship between GDP and unemployment. Growth rates of real GDP, consumptionPercent change from 4 quarters earlierAverage growth rateReal GDP growth rateConsumption growth rateGrowth rates of real GDP, consu
5、mption, investmentPercent change from 4 quarters earlierInvestment growth rateReal GDP growth rateConsumption growth rateUnemploymentPercent of labor forceOkuns LawPercentage change in real GDPChange in unemployment rate197519821991200119841951196620031987200819718CHAPTER 9 Introduction to Economic
6、FluctuationsIndex of Leading Economic IndicatorsPublished monthly by the Conference Board.Aims to forecast changes in economic activity 6-9 months into the future. Used in planning by businesses and govt, despite not being a perfect predictor. 9CHAPTER 9 Introduction to Economic FluctuationsComponen
7、ts of the LEI indexAverage workweek in manufacturingInitial weekly claims for unemployment insuranceNew orders for consumer goods and materialsNew orders, nondefense capital goodsVendor performanceNew building permits issuedIndex of stock pricesM2Yield spread (10-year minus 3-month) on TreasuriesInd
8、ex of consumer expectationsIndex of Leading Economic IndicatorsSource: Conference Board2004 = 10011CHAPTER 9 Introduction to Economic FluctuationsTime horizons in macroeconomicsLong run Prices are flexible, respond to changes in supply or demand.Short runMany prices are “sticky” at a predetermined l
9、evel.The economy behaves much differently when prices are sticky.12CHAPTER 9 Introduction to Economic FluctuationsRecap of classical macro theory (Chaps. 3-8)Output is determined by the supply side:supplies of capital, labortechnologyChanges in demand for goods & services (C, I, G ) only affect pric
10、es, not quantities.Assumes complete price flexibility. Applies to the long run.13CHAPTER 9 Introduction to Economic FluctuationsWhen prices are stickyoutput and employment also depend on demand, which is affected by:fiscal policy (G and T )monetary policy (M )other factors, like exogenous changes in
11、 C or I 14CHAPTER 9 Introduction to Economic FluctuationsThe model of aggregate demand and supplyThe paradigm most mainstream economists and policymakers use to think about economic fluctuations and policies to stabilize the economy Shows how the price level and aggregate output are determinedShows
12、how the economys behavior is different in the short run and long run15CHAPTER 9 Introduction to Economic FluctuationsAggregate demandThe aggregate demand curve shows the relationship between the price level and the quantity of output demanded. For this chapters intro to the AD/AS model, we use a sim
13、ple theory of aggregate demand based on the quantity theory of money. Chapters 10-12 develop the theory of aggregate demand in more detail. 16CHAPTER 9 Introduction to Economic FluctuationsThe Quantity Equation as Aggregate DemandFrom Chapter 4, recall the quantity equationM V = P Y For given values
14、 of M and V, this equation implies an inverse relationship between P and Y 17CHAPTER 9 Introduction to Economic FluctuationsThe downward-sloping AD curveAn increase in the price level causes a fall in real money balances (M/P ),causing a decrease in the demand for goods & services.Y PAD18CHAPTER 9 I
15、ntroduction to Economic FluctuationsShifting the AD curveAn increase in the money supply shifts the AD curve to the right. Y PAD1AD219CHAPTER 9 Introduction to Economic FluctuationsAggregate supply in the long runRecall from Chapter 3: In the long run, output is determined by factor supplies and tec
16、hnologyis the full-employment or natural level of output, at which the economys resources are fully employed.“Full employment” means that unemployment equals its natural rate (not zero).20CHAPTER 9 Introduction to Economic FluctuationsThe long-run aggregate supply curveY PLRAS does not depend on P,
17、so LRAS is vertical. 21CHAPTER 9 Introduction to Economic FluctuationsLong-run effects of an increase in MY PAD1LRASAn increase in M shifts AD to the right. P1P2In the long run, this raises the price levelbut leaves output the same.AD222CHAPTER 9 Introduction to Economic FluctuationsAggregate supply
18、 in the short runMany prices are sticky in the short run. For now (and through Chap. 12), we assume all prices are stuck at a predetermined level in the short run.firms are willing to sell as much at that price level as their customers are willing to buy. Therefore, the short-run aggregate supply (S
19、RAS) curve is horizontal:23CHAPTER 9 Introduction to Economic FluctuationsThe short-run aggregate supply curveY PSRASThe SRAS curve is horizontal:The price level is fixed at a predetermined level, and firms sell as much as buyers demand.24CHAPTER 9 Introduction to Economic FluctuationsShort-run effe
20、cts of an increase in MY PAD1In the short run when prices are sticky,causes output to rise.SRASY2Y1AD2an increase in aggregate demand25CHAPTER 9 Introduction to Economic FluctuationsFrom the short run to the long runOver time, prices gradually become “unstuck.” When they do, will they rise or fall?
21、risefallremain constantIn the short-run equilibrium, ifthen over time, P willThe adjustment of prices is what moves the economy to its long-run equilibrium.26CHAPTER 9 Introduction to Economic FluctuationsThe SR & LR effects of M 0Y PAD1LRASSRASP2Y2A = initial equilibriumABCB = new short-run eqm aft
22、er Fed increases MC = long-run equilibriumAD227CHAPTER 9 Introduction to Economic FluctuationsHow shocking!shocks: exogenous changes in agg. supply or demandShocks temporarily push the economy away from full employment.Example: exogenous decrease in velocity If the money supply is held constant, a d
23、ecrease in V means people will be using their money in fewer transactions, causing a decrease in demand for goods and services.28CHAPTER 9 Introduction to Economic FluctuationsSRASLRASAD2The effects of a negative demand shockY PAD1P2Y2AD shifts left, depressing output and employment in the short run
24、.ABCOver time, prices fall and the economy moves down its demand curve toward full-employment.29CHAPTER 9 Introduction to Economic FluctuationsSupply shocksA supply shock alters production costs, affects the prices that firms charge. (also called price shocks)Examples of adverse supply shocks:Bad we
25、ather reduces crop yields, pushing up food prices. Workers unionize, negotiate wage increases. New environmental regulations require firms to reduce emissions. Firms charge higher prices to help cover the costs of compliance. Favorable supply shocks lower costs and prices.30CHAPTER 9 Introduction to
26、 Economic FluctuationsCASE STUDY: The 1970s oil shocksEarly 1970s: OPEC coordinates a reduction in the supply of oil.Oil prices rose11% in 1973 68% in 1974 16% in 1975Such sharp oil price increases are supply shocks because they significantly impact production costs and prices.31CHAPTER 9 Introducti
27、on to Economic FluctuationsSRAS1Y PADLRASY2CASE STUDY: The 1970s oil shocksThe oil price shock shifts SRAS up, causing output and employment to fall. ABIn absence of further price shocks, prices will fall over time and economy moves back toward full employment.SRAS2A32CHAPTER 9 Introduction to Econo
28、mic FluctuationsCASE STUDY: The 1970s oil shocksPredicted effects of the oil shock: inflation output unemployment and then a gradual recovery.33CHAPTER 9 Introduction to Economic FluctuationsCASE STUDY: The 1970s oil shocksLate 1970s: As economy was recovering, oil prices shot up again, causing anot
29、her huge supply shock!34CHAPTER 9 Introduction to Economic FluctuationsCASE STUDY: The 1980s oil shocks1980s: A favorable supply shock-a significant fall in oil prices. As the model predicts, inflation and unemployment fell: 35CHAPTER 9 Introduction to Economic FluctuationsStabilization policydef: p
30、olicy actions aimed at reducing the severity of short-run economic fluctuations.Example: Using monetary policy to combat the effects of adverse supply shocks36CHAPTER 9 Introduction to Economic FluctuationsStabilizing output with monetary policySRAS1Y PAD1BAY2LRASThe adverse supply shock moves the e
31、conomy to point B.SRAS237CHAPTER 9 Introduction to Economic FluctuationsStabilizing output with monetary policyY PAD1BACY2LRASBut the Fed accommodates the shock by raising agg. demand.results: P is permanently higher, but Y remains at its full-employment level.SRAS2AD2Chapter Summary1.Long run: pric
32、es are flexible, output and employment are always at their natural rates, and the classical theory applies.Short run: prices are sticky, shocks can push output and employment away from their natural rates. 2.Aggregate demand and supply: a framework to analyze economic fluctuationsChapter Summary3. T
33、he aggregate demand curve slopes downward.4. The long-run aggregate supply curve is vertical, because output depends on technology and factor supplies, but not prices.5. The short-run aggregate supply curve is horizontal, because prices are sticky at predetermined levels.Chapter Summary6. Shocks to aggregate demand and supply cause fluctuations in GDP and employment in the short run.7.The Fed can attempt to stabilize the economy with monetary policy.
