ECON 2003 MACROECONOMICS

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28 Οκτ 2013 (πριν από 3 χρόνια και 9 μήνες)

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CHAPTER 9


INTRODUCTION TO
ECONOMIC FLUCTUATIONS

ECON 2003

MACROECONOMICS

1

Assoc. Prof. Yesim Kustepeli


Recessions
: periods of falling incomes and rising
unemployment



Business cycle
: short run fluctuations in outut and
employment



Short run
fluctuations



2

Assoc. Prof. Yesim Kustepeli

TIME HORIZONS IN MACROECONOMICS


Classical theory applies to the long run, not the
short run.



The key difference between short run and long run
is the behaviour of prices.



In the long run, output and velocity of money are
fixed; a change in the money supply affects directly
prices.

3

Assoc. Prof. Yesim Kustepeli


In short run, prices are not fully flexible; thus a
change in the money supply may affect output and
employment.



Economic fluctuations short run price
stickiness



classical dichotomy no longer holds
nominal variables affect real variables.




4

Assoc. Prof. Yesim Kustepeli

Model of AS
and

AD


Flexible prices are crucial for the classical theory.



When prices are sticky, output depends on the
demand for goods and services.



Because monetary and fiscal policies can influence
the economy’s output over the time horizon when
prices are sticky, there is a rationale for why these
policies may be useful in stabilizing the economy in
the short run.

5

Assoc. Prof. Yesim Kustepeli


Short run:
prices are sticky ; capital and labor are
sometimes not fully employed.



Long run:
classical model; prices are flexible;
capital and labor are fully employed.



Very long run:
basic theory of economic growth,
cpital stock, labor force and technology can
change.

6

Assoc. Prof. Yesim Kustepeli

AGGREGATE DEMAND


Aggregate demand
is the relationship between
quantity of output demanded and aggregate price
level.


The quantity equation as aggregate demand :


M*V = P*Y


M/P = kY



For any fixed money supply and velocity, the
quantity equation yields a negative relationship
between P and Y.

7

Assoc. Prof. Yesim Kustepeli

Assoc. Prof. Yesim Kustepeli

8


Once

PY is
fixed
,
if

P
goes

up
, Y
must

go

down
.



The

aggregate

demand

curve

is
drawn

for

a
fixed

value

of
the

money

supply
.



If

the

money

supply

changes
,
the

aggregate

demand

shifts
.



If

the

velocity

of
money

changes
,
the

aggregate

demand

shifts
.

AGGREGATE SUPPLY

Assoc. Prof. Yesim Kustepeli

9


Aggregate

supply

is
the

relationship

between

the

quantity

of
goods

and

services

supplied

and

the

price

level
.



The

long

run
:
the

vertical

aggregate

supply

curve


According

to

the

classical

model,
output

doesnot

depend

on
the

price

level
.


The

verical

AS
curve

satisfies

the

classical

dichotomy
;
output

is at
its

full
-
employment

or

natural

level
.



Assoc. Prof. Yesim Kustepeli

10


The

short

run
:
the

horizontal

aggregate

supply

curve


Some

prices

are

sticky

and

donot

adjust

to

changes

in
demand
.


Changes

in
aggregate

demand

affet
the

level

of
output
.



From

short

run

to

the

long

run



Long

run

equilibrium

is
where

short

run

AS,
long

run

AS
and

AD
intersect
.


Changes

in
aggregate

demand

affect

the

level

of
output

in
short

run

but
return

to

the

long

run

level

.


STABILIZATION POLICY

Assoc. Prof. Yesim Kustepeli

11


Exogenous

changes

in AS
or

AD
are

called

shocks

to

the

economy
.


Shocks

to

AD:
demand

shock


Shocks

to

AS:
supply

shock



One

goal

of
the

AS
and

AD model is
to

show

how

shocks

cause

economic

fluctuations
.


Another

goal

of
the

model is
to

evaluate

how

macroeconomic

policy

can
respond

to

these

shocks
::
stabilization

policy