Professional Documents
Culture Documents
Introduction to Economic
Fluctuations
University of Wisconsin
Charles Engel
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Growth
Growth rates
rates of
of real
real GDP,
GDP, consumption
consumption
Percent 10
change
from 4 8
quarters
earlier 6
Real GDP
growth rate
Consumption
growth rate
Average 4
growth
rate 2
0
-2
-4
1970
1975
1980
1985
1990
1995
2000
2005
Growth
Growth rates
rates of
of real
real GDP,
GDP, consumption,
consumption, investment
investment
Percent 40
change
from 4 30
quarters
earlier 20
Investment
growth rate
Real GDP
growth rate
10
0
Consumption
growth rate
-10
-20
-30
1970
1975
1980
1985
1990
1995
2000
2005
Unemployment
Unemployment
Percent 12
of labor
force
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
2000
2005
Okuns
Okuns Law
Law
Percentage 10
change in
real GDP 8
1951
Y
3.5 2 u
Y
1966
1984
2003
4
1987
2
0
1975
2001
-2
1991 1982
-4
-3
-2
-1
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Time horizons in
macroeconomics
Long run:
Prices are flexible, respond to changes in supply
or demand.
Short run:
Many prices are sticky at some predetermined
level.
The economy behaves much
differently when prices are sticky.
CHAPTER 9.01
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CHAPTER 9.01
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The model of
aggregate demand and
supply
CHAPTER 9.01
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Aggregate demand
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CHAPTER 9.01
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CHAPTER 9.01
AD
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An
An increase
increase in
in
the
the money
money supply
supply
shifts
shifts the
the AD
AD
curve
curve to
to the
the right.
right.
AD
AD
1
CHAPTER 9.01
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Y F (K , L)
Y is the full-employment or natural level of
output, the level of output at which the
economys resources are fully employed.
Full employment means that
unemployment equals its natural rate (not zero).
CHAPTER 9.01
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LRAS
Y does
does not
not
depend
depend on
on P,
P,
so
so LRAS
LRAS is
is
vertical.
vertical.
Y
F (K , L)
CHAPTER 9.01
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LRAS
P2
An increase
in M shifts
AD to the
right.
P1
AD
AD
but leaves
output the same.
CHAPTER 9.01
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CHAPTER 9.01
SRAS
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an increase
in aggregate
demand
SRAS
AD
AD2
1
causes output
to rise.
CHAPTER 9.01
Y1
Y2
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Y Y
rise
Y Y
fall
Y Y
remain constant
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C = long-run
equilibrium
CHAPTER 9.01
LRAS
P2
B
A
SRAS
AD
AD2
1
Y2
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Shock!!!
shocks: exogenous changes in agg. supply or
demand
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LRAS
P2
SRAS
AD
AD1
2
Y2
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Supply shocks
A supply shock alters production costs, affects the
prices that firms charge. (also called price shocks)
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CASE STUDY:
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CASE STUDY:
In
In absence
absence of
of
further
further price
price
shocks,
shocks, prices
prices will
will
fall
fall over
over time
time and
and
economy
economy moves
moves
back
back toward
toward full
full
employment.
employment.
CHAPTER 9.01
P2
LRAS
SRAS2
A
P1
SRAS1
AD
Y2
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CASE STUDY:
CHAPTER 9.01
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CASE STUDY:
CHAPTER 9.01
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CASE STUDY:
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Stabilization policy
CHAPTER 9.01
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The
The adverse
adverse
supply
supply shock
shock
moves
moves the
the
economy
economy to
to
point
point B.
B.
P2
LRAS
SRAS2
A
P1
SRAS1
AD
1
Y2
CHAPTER 9.01
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P2
LRAS
SRAS2
C
A
P1
AD
AD
Y2
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Chapter Summary
1. Long run: prices are flexible, output and employment
CHAPTER 9
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Chapter Summary
3. The aggregate demand curve slopes downward.
4. The long-run aggregate supply curve is vertical,
CHAPTER 9
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Chapter Summary
6. Shocks to aggregate demand and supply cause
monetary policy.
CHAPTER 9
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