程序代写代做代考 case study flex Mankiw 6e PowerPoints

Mankiw 6e PowerPoints

CHAPTER 10 Introduction to Economic Fluctuations
This chapter has two main objectives: motivating the study of short-run fluctuations, and introducing (a simple version of) the model of aggregate demand and aggregate supply.

Regarding the first objective, the chapter provides lots of data and discussion of the macroeconomy’s behavior in the short run. Regarding the second, the presentation here is best seen as providing the overall context or outline, which will be considerably fleshed out over the next few chapters.

This chapter is less difficult than most other chapters in the book, and all of the concepts it introduces are all developed in more detail in the following chapters of Part IV. Therefore, you might consider spending a little less class time on this chapter than on other chapters.

Please note that the AD curve in this chapter is based on the quantity theory of money. This simple theory, familiar to students from earlier chapters, yields a simple AD curve, which is adequate for the purposes of this chapter’s basic introduction to AD/AS.

IN THIS CHAPTER, YOU WILL LEARN:
facts about the business cycle
how the short run differs from the long run
an introduction to aggregate demand
an introduction to aggregate supply in the short run and long run
how the model of aggregate demand and aggregate supply can be used to analyze the short-run and long-run effects of “shocks.”

CHAPTER 10 Introduction to Economic Fluctuations

Facts about the business cycle
GDP growth averages 3–3.5 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.
Unemployment rises during recessions and falls during expansions.
Okun’s law: the negative relationship between GDP and unemployment.

CHAPTER 10 Introduction to Economic Fluctuations

The four slides that follow provide data on each of these points.

Suggestion: “hide” (omit) this slide from your presentation, and instead give students this information orally as you display the following slides.

Growth rates of real GDP, consumption
Percent change from 4 quarters earlier

Average growth rate

Real GDP
growth rate

Consumption growth rate

CHAPTER 10 Introduction to Economic Fluctuations
The shaded vertical bars denote recessions.

Over the long run, real GDP grows about 3 percent per year. Over the short run, though, there are substantial fluctuations in GDP, as this graph clearly shows.

This graph also shows the growth rate of consumption. It’s easy to see that consumption is usually less volatile than income. Consumers prefer smooth consumption, so they use saving as a buffer against income shocks.

(An exception occurs in the late 1990s, when consumption growth exceeded income growth – probably due to the stock market boom.)

Source of data: FRED

Recession 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 2012.5 2012.75 2013 2013.25 2013.5 2013.75 2014 2014.25 2014.5 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Var GDP 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 2012.5 2012.75 2013 2013.25 2013.5 2013.75 2014 2014.25 2014.5 0.33038 0.18484 0.44551 -0.15269 2.7023 3.10684 3.00177 4.37525 3.47724 5.27366 5.41633 6.8555 7.55837 6.3146 4.77214 4.02194 0.67838 -0.18745 -0.61346 -1.92589 -2.30017 -1.8062 0.79387 2.56104 6.16167 6.1464 4.95075 4.3335 3.21616 4.45151 5.76119 4.98386 4.1385 6.10519 5.27951 6.6814 6.52073 2.65859 2.3961 1.30212 1.42857 -0.74835 -1.60626 -0.04151 1.69811 3.04571 4.38672 1.29053 -2.42175 -1.17043 -2.64299 -1.39709 1.59382 3.35013 5.75322 7.82985 8.54945 7.99162 6.96064 5.63451 4.60606 3.74209 4.32981 4.28069 4.21179 3.73977 3.17954 2.94194 2.70937 3.38755 3.28413 4.44864 4.30644 4.51223 4.17137 3.83711 4.29772 3.74697 3.92078 2.77904 2.86742 2.45947 1.72564 0.64631 -0.91091 -0.52663 -0.07346 1.2237 2.90336 3.23581 3.74166 4.32656 3.30045 2.78202 2.28815 2.62584 3.43906 4.23308 4.33957 4.13322 3.47449 2.43589 2.70733 2.27506 2.59545 4.02387 4.09451 4.45376 4.56289 4.31933 4.67874 4.3877 4.62346 4.06766 4.10464 4.99897 4.80073 4.64964 4.59821 4.69471 4.16698 5.26646 4.08318 2.88884 2.29952 0.93548 0.49494 0.20506 1.41577 1.43742 2.25492 2.03616 1.62919 2.00962 3.21555 4.35591 4.41479 4.21302 3.42796 3.11708 3.62033 3.40357 3.33314 3.03217 3.17042 2.94157 2.17467 2.38983 1.23676 1.70738 2.30028 1.86792 1.11028 0.84037 -0.31395 -2.76685 -3.45546 -4.06191 -3.2844 -0.24079 1.59861 2.7188 3.07585 2.73073 1.89321 1.65266 1.18285 1.68217 2.6456 2.31561 2.73083 1.60234 1.72439 1.75983 2.25904 3.12628 1.88758 2.58737 2.69774 Var Consump Expend 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 2012.5 2012.75 2013 2013.25 2013.5 2013.75 2014 2014.25 2014.5 2.56556 2.38668 2.78325 1.69302 3.00097 3.47066 3.38913 5.3927 4.77955 5.80736 6.58919 7.30873 7.84364 5.77882 4.54475 1.84539 -0.84953 -0.46222 -0.40708 -1.5795 0.11725 1.43503 2.45845 5.08706 6.29692 5.51421 5.13381 5.38827 4.50578 4.12316 4.01064 4.21873 3.63572 5.26641 4.7108 3.98237 3.90725 1.67531 2.24816 1.70804 1.03923 -1.1755 -1.08444 -0.03969 0.64098 2.93811 2.2505 0.15386 0.29129 0.68146 1.05253 3.67452 3.98996 5.66005 6.68987 6.42895 6.29852 5.72125 4.69652 4.43501 5.31742 4.8101 6.00871 4.89389 4.01717 4.20184 4.08977 4.48722 3.6242 3.89973 3.23409 2.79369 4.60377 3.93136 3.61665 4.58432 3.23288 2.96171 3.10464 2.38695 2.79196 2.63063 2.0319 0.81453 -0.38878 0.13389 0.21581 0.95115 3.20395 3.0471 3.65916 4.9211 3.3778 3.59551 3.61613 3.30657 4.09385 3.96842 3.63174 3.82602 2.92168 3.045 3.18988 2.8089 3.48906 3.68262 3.35955 3.44509 3.57539 2.92721 4.06147 4.47608 4.45252 5.81766 5.40659 5.69888 5.71274 5.48964 5.36591 5.28694 5.78693 5.1394 4.92931 4.4073 3.20561 2.53252 1.86304 2.45537 2.41781 2.68198 3.0646 1.99181 2.17192 2.77525 3.53527 3.86661 4.40876 3.88531 3.36869 3.66714 3.44316 3.88313 3.6756 3.00391 3.32855 2.80191 2.65688 3.26888 2.71941 2.51888 2.30541 1.46336 0.70365 0.53169 -0.63659 -1.95501 -2.08926 -2.69401 -1.39129 -0.20132 0.67913 1.95791 1.9988 3.05429 3.01885 2.39338 2.17726 1.48238 1.66877 1.78263 1.83035 1.97542 2.17663 2.30514 2.31987 2.7641 2.17266 2.36576 2.67145

Growth rates of real GDP, consump., investment

Investment growth rate

Real GDP
growth rate

Consumption growth rate
Percent change from 4 quarters earlier

CHAPTER 10 Introduction to Economic Fluctuations
This graph shows consumption growth and GDP growth, the same data from the previous slide, but now the vertical axis has a much bigger scale to accommodate the addition of investment growth.

The point: Investment is far more volatile than GDP or consumption.

Source: FRED

Recession 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Var GDP 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.2 5 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 2012.5 2012.75 2013 2013.25 2013.5 2013.75 2014 2014.25 2014.5 0.33038 0.18484 0.44551 -0.15269 2.7023 3.10684 3.00177 4.37525 3.47724 5.27366 5.41633 6.8555 7.55837 6.3146 4.77214 4.02194 0.67838 -0.18745 -0.61346 -1.92589 -2.30017 -1.8062 0.79387 2.56104 6.16167 6.1464 4.95075 4.3335 3.21616 4.45151 5.76119 4.98386 4.1385 6.10519 5.27951 6.6814 6.52073 2.65859 2.3961 1.30212 1.42857 -0.74835 -1.60626 -0.04151 1.69811 3.04571 4.38672 1.29053 -2.42175 -1.17043 -2.64299 -1.39709 1.59382 3.35013 5.75322 7.82985 8.54945 7.99162 6.96064 5.63451 4.60606 3.74209 4.32981 4.28069 4.21179 3.73977 3.17954 2.94194 2.70937 3.38755 3.28413 4.44864 4.30644 4.51223 4.17137 3.83711 4.29772 3.74697 3.92078 2.77904 2.86742 2.45947 1.72564 0.64631 -0.91091 -0.52663 -0.07346 1.2237 2.90336 3.23581 3.74166 4.32656 3.30045 2.78202 2.28815 2.62584 3.43906 4.23308 4.33957 4.13322 3.47449 2.43589 2.70733 2.27506 2.59545 4.02387 4.09451 4.45376 4.56289 4.31933 4.67874 4.3877 4.62346 4.06766 4.10464 4.99897 4.80073 4.64964 4.59821 4.69471 4.16698 5.26646 4.08318 2.88884 2.29952 0.93548 0.49494 0.20506 1.41577 1.43742 2.25492 2.03616 1.62919 2.00962 3.21555 4.35591 4.41479 4.21302 3.42796 3.11708 3.62033 3.40357 3.33314 3.03217 3.17042 2.94157 2.17467 2.38983 1.23676 1.70738 2.30028 1.86792 1.11028 0.84037 -0.31395 -2.76685 -3.45546 -4.06191 -3.2844 -0.24079 1.59861 2.7188 3.07585 2.73073 1.89321 1.65266 1.18285 1.68217 2.6456 2.31561 2.73083 1.60234 1.72439 1.75983 2.25904 3.12628 1.88758 2.58737 2.69774 Var Consump Expend 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 2012.5 2012.75 2013 2013.25 2013.5 2013.75 2014 2014.25 2014.5 2.56556 2.38668 2.78325 1.69302 3.00097 3.47066 3.38913 5.3927 4.77955 5.80736 6.58919 7.30873 7.84364 5.77882 4.54475 1.84539 -0.84953 -0.46222 -0.40708 -1.5795 0.11725 1.43503 2.45845 5.08706 6.29692 5.51421 5.13381 5.38827 4.50578 4.12316 4.01064 4.21873 3.63572 5.26641 4.7108 3.98237 3.90725 1.67531 2.24816 1.70804 1.03923 -1.1755 -1.08444 -0.03969 0.64098 2.93811 2.2505 0.15386 0.29129 0.68146 1.05253 3.67452 3.98996 5.66005 6.68987 6.42895 6.29852 5.72125 4.69652 4.43501 5.31742 4.8101 6.00871 4.89389 4.01717 4.20184 4.08977 4.48722 3.6242 3.89973 3.23409 2.79369 4.60377 3.93136 3.61665 4.58432 3.23288 2.96171 3.10464 2.38695 2.79196 2.63063 2.0319 0.81453 -0.38878 0.13389 0.21581 0.95115 3.20395 3.0471 3.65916 4.9211 3.3778 3.59551 3.61613 3.30657 4.09385 3.96842 3.63174 3.82602 2.92168 3.045 3.18988 2.8089 3.48906 3.68262 3.35955 3.44509 3.57539 2.92721 4.06147 4.47608 4.45252 5.81766 5.40659 5.69888 5.71274 5.48964 5.36591 5.28694 5.78693 5.1394 4.92931 4.4073 3.20561 2.53252 1.86304 2.45537 2.41781 2.68198 3.0646 1.99181 2.17192 2.77525 3.53527 3.86661 4.40876 3.88531 3.36869 3.66714 3.44316 3.88313 3.6756 3.00391 3.32855 2.80191 2.65688 3.26888 2.71941 2.51888 2.30541 1.46336 0.70365 0.53169 -0.63659 -1.95501 -2.08926 -2.69401 -1.39129 -0.20132 0.67913 1.95791 1.9988 3.05429 3.01885 2.39338 2.17726 1.48238 1.66877 1.78263 1.83035 1.97542 2.17663 2.30514 2.31987 2.7641 2.17266 2.36576 2.67145 Investment 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 2012.5 2012.75 2013 2013.25 2013.5 2013.75 2014 2014.25 2014.5 -6.34751 -5.58771 -5.96036 -6.43551 7.68444 10.50009 10.04961 13.09046 7.95626 10.94035 11.16691 14.95977 14.17364 12.64205 7.03777 10.15962 -1.8815 -6.26847 -7.78258 -10.41392 -20.2924 -22.35554 -11.76301 -9.84729 17.83125 26.25378 17.57868 15.24189 9.97092 13.36795 18.69101 14.85395 11.90712 11.20316 8.93119 14.31907 12.32139 5.37555 0.6658 -3.35875 -4.18455 -12.25097 -16.63128 -7.20071 2.10998 6.9661 20.93706 6.66168 -12.01678 -8.32447 -14.01092 -17.72273 -5.54341 2.96581 10.46318 31.37218 39.21466 32.02748 26.92608 14.1703 1.25943 -0.2558 -3.03227 1.86348 4.70318 1.1515 -0.89422 -4.13117 -1.51479 0.28761 3.0751 9.76988 1.75507 4.12522 4.68898 -0.49234 8.06096 4.53315 3.0319 0.7398 -1.60357 -0.6141 -1.68066 -6.47289 -10.46038 -10.48691 -6.88975 2.1002 3.67168 9.54326 8.27297 7.76513 12.36079 6.93412 5.36448 7.59611 9.18271 13.88847 12.77367 11.56003 8.57594 1.35822 2.44317 0.84544 1.29595 8.45048 14.12227 11.316 62 12.00492 12.72929 9.69533 11.28396 13.78336 7.09986 8.0264 9.52219 7.84002 8.66978 8.49296 8.61465 4.65503 10.8111 6.74853 3.76538 -0.11216 -6.08319 -6.58065 -11.21601 -3.60943 -2.28997 -0.53559 4.40904 1.66599 1.18512 4.77737 8.66803 7.81675 11.0863 8.94448 7.35451999999999 10.34699 5.18376 4.66598999999999 5.67521 4.10857 4.75984 2.6238 -2.7253 -4.87767 -2.93986 -2.54737 -2.17121 -4.58797 -7.55513 -9.56861 -15.9361 -23.030 83 -26.37175 -24.92307 -10.98098 3.88202 16.2785 21.11312 11.10978 5.61469 4.30175 1.29569 9.5838 13.53552 10.87061 11.00653 2.12892 2.29124 2.561 6.20724 8.67937 4.82962 7.6893 5.38554

Unemployment
Percent of labor force

CHAPTER 10 Introduction to Economic Fluctuations
The unemployment rate rises during recessions and falls during expansions.

Since the 1991 recession, the unemployment rate lags GDP growth, particularly in recoveries. In each of the three recessions since 1990, the unemployment rate continues rising for a few months after the recession ends before it begins to fall.

Source: FRED

Recession 1965 1965.25 1965.5 1965.75 1966 1966.25 1966.5 1966.75 1967 1967.25 1967.5 1967.75 1968 1968.25 1968.5 1968.75 1969 1969.25 1969.5 1969.75 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Unemployment Rate 1965 1965.25 1965.5 1965.75 1966 1966.25 1966.5 1966.75 1967 1967.25 1967.5 1967.75 1968 1968.25 1968.5 1968.75 1969 1969.25 1969.5 1969.75 1970 1970.25 1970.5 1970.75 1971 1971.25 1971.5 1971.75 1972 1972.25 1972.5 1972.75 1973 1973.25 1973.5 1973.75 1974 1974.25 1974.5 1974.75 1975 1975.25 1975.5 1975.75 1976 1976.25 1976.5 1976.75 1977 1977.25 1977.5 1977.75 1978 1978.25 1978.5 1978.75 1979 1979.25 1979.5 1979.75 1980 1980.25 1980.5 1980.75 1981 1981.25 1981.5 1981.75 1982 1982.25 1982.5 1982.75 1983 1983.25 1983.5 1983.75 1984 1984.25 1984.5 1984.75 1985 1985.25 1985.5 1985.75 1986 1986.25 1986.5 1986.75 1987 1987.25 1987.5 1987.75 1988 1988.25 1988.5 1988.75 1989 1989.25 1989.5 1989.75 1990 1990.25 1990.5 1990.75 1991 1991.25 1991.5 1991.75 1992 1992.25 1992.5 1992.75 1993 1993.25 1993.5 1993.75 1994 1994.25 1994.5 1994.75 1995 1995.25 1995.5 1995.75 1996 1996.25 1996.5 1996.75 1997 1997.25 1997.5 1997.75 1998 1998.25 1998.5 1998.75 1999 1999.25 1999.5 1999.75 2000 2000.25 2000.5 2000.75 2001 2001.25 2001.5 2001.75 2002 2002.25 2002.5 2002.75 2003 2003.25 2003.5 2003.75 2004 2004.25 2004.5 2004.75 2005 2005.25 2005.5 2005.75 2006 2006.25 2006.5 2006.75 2007 2007.25 2007.5 2007.75 2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 2011 2011.25 2011.5 2011.75 2012 2012.25 2012.5 2012.75 20 13 2013.25 2013.5 2013.75 2014 2014.25 2014.5 2014.75 4.9 4.7 4.4 4.1 3.9 3.8 3.8 3.7 3.8 3.8 3.8 3.9 3.7 3.6 3.5 3.4 3.4 3.4 3.6 3.6 4.2 4.8 5.2 5.8 5.9 5.9 6 5.9 5.8 5.7 5.6 5.4 4.9 4.9 4.8 4.8 5.1 5.2 5.6 6.6 8.3 8.9 8.5 8.3 7.7 7.6 7.7 7.8 7.5 7.1 6.9 6.7 6.3 6 6 5.9 5.9 5.7 5.9 6 6.3 7.3 7.7 7.4 7.4 7.4 7.4 8.2 8.8 9.4 9.9 10.7 10.4 10.1 9.4 8.5 7.9 7.4 7.4 7.3 7.2 7.3 7.2 7 7 7.2 7 6.8 6.6 6.3 6 5.8 5.7 5.5 5.5 5.3 5.2 5.2 5.2 5.4 5.3 5.3 5.7 6.1 6.6 6.8 6.9 7.1 7.4 7.6 7.6 7.4 7.1 7.1 6.8 6.6 6.6 6.2 6 5.6 5.5 5.7 5.7 5.6 5.5 5.5 5.3 5.3 5.2 5 4.9 4.7 4.6 4.4 4.5 4.4 4.3 4.3 4.2 4.1 4 3.9 4 3.9 4.2 4.4 4.8 5.5 5.7 5.8 5.7 5.9 5.9 6.1 6.1 5.8 5.7 5.6 5.4 5.4 5.3 5.1 5 5 4.7 4.6 4.6 4.4 4.5 4.5 4.7 4.8 5 5.3 6 6.9 8.3 9.3 9.6 9.9 9.8 9.6 9.5 9.5 9.1 9.1 9 8.6 8.3 8.2 8 7.8 7.7 7.5 7.2 7 6.6 6.2 6.1 5.7

Okun’s Law
Percentage change in real GDP
Change in unemployment rate

1975
1982
1991

2001

1984
1951
1966
2003

1987

2008

1971
2009

CHAPTER 10 Introduction to Economic Fluctuations
A replica of Figure 10.4, p.286.

-3 4 9 -5 -0.9 -1.9 -0.3 -0.1 2.7 -1.2 -0.3 0.2 2.5 -1.3 0 1.2 -1.1 0 -0.4 -0.7 -0.7 0 -0.2 -0.1 1.5 1 -0.4 -0.7 0.7 2.9 -0.8 -0.6 -1 -0.2 1.3 0.4 2.1 -0.1 -2.1 -0.3 -0.2 -0.8 -0.7 -0.2 0.3 1.3 0.6 -0.6 -0.8 -0.5 -0.2 -0.5 -0.4 -0.3 -0.2 0.7 1.1 0.2 -0.5 -0.4 -0.5 0 1.2 3.5 0.3 -0.7 -0.8 -0.7 8.7 8.1 4.1 4.7 -0.6 7.1 2.1 2.1 -0.7 6.9 2.6 2.6 6.1 4.4 5.8 6.5 6.6 2.7 4.9 3.1 0.2 3.3 5.2 5.6 -0.5 -0.2 5.4 4.6 5.6 3.2 -0.2 2.6 -1.9 4.6 7.3 4.2 3.5 3.5 4.2 3.7 1.9 -0.1 3.6 2.7 4 2.7 3.8 4.5 4.5 4.7 4.1 1 1.8 2.8 3.8 3.3 2.7 1.8 -0.3 -2.8 2.5 1.6 2.3 2.2

Index of Leading Economic Indicators
Published 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.

CHAPTER 10 Introduction to Economic Fluctuations

Components of the LEI index
Average workweek in manufacturing
Initial weekly claims for unemployment insurance
New orders for consumer goods and materials
New orders, nondefense capital goods
Vendor performance
New building permits issued
Index of stock prices
M2
Yield spread (10-year minus 3-month) on Treasuries
Index of consumer expectations

CHAPTER 10 Introduction to Economic Fluctuations

I’ve abbreviated some of the names to fit more neatly on this slide.
Pp. 287–88 provides a full list of complete names and a discussion of the role of each component in helping forecast economic activity.

Index of Leading Economic Indicators, 1970-2012
Source:
Conference Board
2004 = 100

CHAPTER 10 Introduction to Economic Fluctuations
The index turns downward a few months to a year before almost every recession. It also turns upward just prior to the end of almost every recession.

Source: Conference Board. http://www.conference-board.org

Recession 1970.08333333333 1970.16666666667 1970.25 1970.33333333333 1970.41666666667 1970.5 1970.58333333333 1970.66666666667 1970.75 1970.83333333333 1970.91666666667 1971 1971.08333333334 1971.16666666667 1971.25 1971.33333333334 1971.41666666667 1971.5 1971.58333333334 1971.66666666667 1971.75 1971.83333333334 1971.91666666667 1972 1972.08333333334 1972.16666666667 1972.25 1972.33333333334 1972.41666666667 1972.5 1972.58333333334 1972.66666666667 1972.75 1972.83333333334 1972.91666666667 1973.00000000001 1973.08333333334 1973.16666666667 1973.25000000001 1973.33333333334 1973.41666666667 1973.50000000001 1973.58333333334 1973.66666666667 1973.75000000001 1973.83333333334 1973.91666666667 1974.00000000001 1974.08333333334 1974.16666666667 1974.25000000001 1974.33333333334 1974.41666666667 1974.50000000001 1974.58333333334 1974.66666666667 1974.75000000001 1974.83333333334 1974.91666666668 1975.00000000001 1975.08333333334 1975.16666666668 1975.25000000001 1975.33333333334 1975.41666666668 1975.50000000001 1975.58333333334 1975.66666666668 1975.75000000001 1975.83333333334 1975.91666666668 1976.00000000001 1976.08333333334 1976.16666666668 1976.25000000001 1976.33333333334 1976.41666666668 1976.50000000001 1976.58333333335 1976.66666666668 1976.75000000001 1976.83333333335 1976.91666666668 1977.00000000001 1977.08333333335 1977.16666666668 1977.25000000001 1977.33333333335 1977.41666666668 1977.50000000001 1977.58333333335 1977.66666666668 1977.75000000001 1977.83333333335 1977.91666666668 1978.00000000001 1978.08333333335 1978.16666666668 1978.25000000001 1978.33333333335 1978.41666666668 1978.50000000002 1978.58333333335 1978.66666666668 1978.75000000002 1978.83333333335 1978.91666666668 1979.00000000002 1979.08333333335 1979.16666666668 1979.25000000002 1979.33333333335 1979.41666666668 1979.50000000002 1979.58333333335 1979.66666666668 1979.75000000002 1979.83333333335 1979.91666666668 1980.00000000002 1980.08333333335 1980.16666666668 1980.25000000002 1980.33333333335 1980.41666666669 1980.50000000002 1980.58333333335 1980.66666666669 1980.75000000002 1980.83333333335 1980.91666666669 1981.00000000002 1981.08333333335 1981.16666666669 1981.25000000002 1981.33333333335 1981.41666666669 1981.50000000002 1981.58333333335 1981.66666666669 1981.75000000002 1981.83333333335 1981.91666666669 1982.00000000002 1982.08333333336 1982.16666666669 1982.25000000002 1982.33333333336 1982.41666666669 1982.50000000002 1982.58333333336 1982.66666666669 1982.75000000002 1982.83333333336 1982.91666666669 1983.00000000002 1983.08333333336 1983.16666666669 1983.2500 0000002 1983.33333333336 1983.41666666669 1983.50000000002 1983.58333333336 1983.66666666669 1983.75000000002 1983.83333333336 1983.91666666669 1984.00000000003 1984.08333333336 1984.16666666669 1984.25000000003 1984.33333333336 1984.41666666669 1984.50000000003 1984.58333333336 1984.66666666669 1984.75000000003 1984.83333333336 1984.91666666669 1985.00000000003 1985.08333333336 1985.16666666669 1985.25000000003 1985.33333333336 1985.41666666669 1985.50000000003 1985.58333333336 1985.66666666669 1985.75000000003 1985.83333333336 1985.9166666667 1986.00000000003 1986.08333333336 1986.1666666667 1986.25000000003 1986.33333333336 1986.4166666667 1986.50000000003 1986.58333333336 1986.6666666667 1986.75000000003 1986.83333333336 1986.9166666667 1987.00000000003 1987.08333333336 1987.1666666667 1987.25000000003 1987.33333333336 1987.4166666667 1987.50000000003 1987.58333333337 1987.6666666667 1987.75000000003 1987.83333333337 1987.9166666667 1988.00000000003 1988.08333333337 1988.1666666667 1988.25000000003 1988.33333333337 1988.4166666667 1988.50000000003 1988.58333333337 1988.6666666667 1988.75000000003 1988.83333333337 1988.9166666667 1989.00000000003 1989.08333333337 1989.1666666667 1989.25000000003 1989.33333333337 1989.4166666667 1989.50000000004 1989.58333333337 1989.6666666667 1989.75000000004 1989.83333333337 1989.9166666667 1990.00000000004 1990.08333333337 1990.1666666667 1990.25000000004 1990.33333333337 1990.4166666667 1990.50000000004 199 0.58333333337 1990.6666666667 1990.75000000004 1990.83333333337 1990.9166666667 1991.00000000004 1991.08333333337 1991.1666666667 1991.25000000004 1991.33333333337 1991.41666666671 1991.50000000004 1991.58333333337 1991.66666666671 1991.75000000004 1991.83333333337 1991.91666666671 1992.00000000004 1992.08333333337 1992.16666666671 1992.25000000004 1992.33333333337 1992.41666666671 1992.50000000004 1992.58333333337 1992.66666666671 1992.75000000004 1992.83333333337 1992.91666666671 1993.00000000004 1993.08333333338 1993.16666666671 1993.25000000004 1993.33333333338 1993.41666666671 1993.50000000004 1993.58333333338 1993.66666666671 1993.75000000004 1993.83333333338 1993.91666666671 1994.00000000004 1994.08333333338 1994.16666666671 1994.25000000004 1994.33333333338 1994.41666666671 1994.50000000004 1994.58333333338 1994.66666666671 1994.75000000004 1994.83333333338 1994.91666666671 1995.00000000005 1995.08333333338 1995.16666666671 1995.25000000005 1995.33333333338 1995.41666666671 1995.50000000005 1995.58333333338 1995.66666666671 1995.75000000005 1995.83333333338 1995.91666666671 1996.00000000005 1996.08333333338 1996.16666666671 1996.25000000005 1996.33333333338 1996.41666666671 1996.50000000005 1996.58333333338 1996.66666666671 1996.75000000005 1996.83333333338 1996.91666666672 1997.00000000005 1997.08333333338 1997.16666666672 1997.25000000005 1997.33333333338 1997.41666666672 1997.50000000005 1997.58333333338 1997.66666666672 1997.75000000005 1997.83333333338 1997.91666666672 1998.00000000005 1998.08333333338 1998.16666666672 1998.25000000005 1998.33333333338 1998.41666666672 1998.50000000005 1998.58333333339 1998.66666666672 1998.75000000005 1998.83333333339 1998.91666666672 1999.00000000005 1999.08333333339 1999.16666666672 1999.25000000005 1999.33333333339 1999.41666666672 1999.50000000005 1999.58333333339 1999.66666666672 1999.75000000005 1999.83333333339 1999.91666666672 2000.00000000005 2000.08333333339 2000.16666666672 2000.25000000005 2000.33 333333339 2000.41666666672 2000.50000000006 2000.58333333339 2000.66666666672 2000.75000000006 2000.83333333339 2000.91666666672 2001.00000000006 2001.08333333339 2001.16666666672 2001.25000000006 2001.33333333339 2001.41666666672 2001.50000000006 2001.58333333339 2001.66666666672 2001.75000000006 2001.83333333339 2001.91666666672 2002.00000000006 2002.08333333339 2002.16666666672 2002.25000000006 2002.33333333339 2002.41666666673 2002.50000000006 2002.58333333339 2002.66666666673 2002.75000000006 2002.83333333339 2002.91666666673 2003.00000000006 2003.08333333339 2003.16666666673 2003.25000000006 2003.33333333339 2003.41666666673 2003.50000000006 2003.58333333339 2003.66666666673 2003.75000000006 2003.83333333339 2003.91666666673 2004.00000000006 2004.0833333334 2004.16666666673 2004.25000000006 2004.3333333334 2004.41666666673 2004.50000000006 2004.5833333334 2004.66666666673 2004.75000000006 2004.8333333334 2004.91666666673 2005.00000000006 2005.0833333334 2005.16666666673 2005.25000000006 2005.3333333334 2005.41666666673 2005.50000000006 2005.5833333334 2005.66666666673 2005.75000000006 2005.8333333334 2005.91666666673 2006.00000000007 2006.0833333334 2006.16666666673 2006.25000000007 2006.3333333334 2006.41666666673 2006.50000000007 2006.5833333334 2006.66666666673 2006.75000000007 2006.8333333334 2006.91666666673 2007.00000000007 2007.0833333334 2007.16666666673 2007.25000000007 2007.3333333334 2007.41666666673 2007.50000000007 2007.5833333334 200 7.66666666673 2007.75000000007 2007.8333333334 2007.91666666674 2008.00000000007 2008.0833333334 2008.16666666674 2008.25000000007 2008.3333333334 2008.41666666674 2008.50000000007 2008.5833333334 2008.66666666674 2008.75000000007 2008.8333333334 2008.91666666674 2009.00000000007 2009.0833333334 2009.16666666674 2009.25000000007 2009.3333333334 2009.41666666674 2009.50000000007 2009.58333333341 2009.66666666674 2009.75000000007 2009.83333333341 2009.91666666674 2010.00000000007 2010.08333333341 2010.16666666674 2010.25000000007 2010.33333333341 2010.41666666674 2010.50000000007 2010.58333333341 2010.66666666674 2010.75000000007 2010.83333333341 2010.91666666674 2011.00000000007 2011.08333333341 2011.16666666674 2011.25000000007 2011.33333333341 2011.41666666674 2011.50000000008 2011.58333333341 2011.66666666674 2011.75000000008 2011.83333333341 2011.91666666674 2012.00000000008 2012.08333333341 2012.16666666674 2012.25000000008 2012.33333333341 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Index 1970.08333333333 1970.16666666667 1970.25 1970.33333333333 1970.41666666667 1970.5 1970.58333333333 1970.66666666667 1970.75 1970.83333333333 1970.91666666667 1971 1971.08333333334 1971.16666666667 1971.25 1971.33333333334 1971.41666666667 1971.5 1971.58333333334 1971.66666666667 1971.75 1971.83333333334 1971.91666666667 1972 1972.08333333334 1972.16666666667 1972.25 1972.33333333334 1972.41666666667 1972.5 1972.58333333334 1972.66666666667 1972.75 1972.83333333334 1972.91666666667 1973.00000000001 1973.08333333334 1973.16666666667 1973.25000000001 1973.33333333334 1973.41666666667 1973.50000000001 1973.58333333334 1973.66666666667 1973.75000000001 1973.83333333334 1973.91666666667 1974.00000000001 1974.08333333334 1974.16666666667 1974.250 00000001 1974.33333333334 1974.41666666667 1974.50000000001 1974.58333333334 1974.66666666667 1974.75000000001 1974.83333333334 1974.91666666668 1975.00000000001 1975.08333333334 1975.16666666668 1975.25000000001 1975.33333333334 1975.41666666668 1975.50000000001 1975.58333333334 1975.66666666668 1975.75000000001 1975.83333333334 1975.91666666668 1976.00000000001 1976.08333333334 1976.16666666668 1976.25000000001 1976.33333333334 1976.41666666668 1976.50000000001 1976.58333333335 1976.66666666668 1976.75000000001 1976.83333333335 1976.91666666668 1977.00000000001 1977.08333333335 1977.16666666668 1977.25000000001 1977.33333333335 1977.41666666668 1977.50000000001 1977.58333333335 1977.66666666668 1977.75000000001 1977.83333333335 1977.91666666668 1978.00000000001 1978.08333333335 1978.16666666668 1978.25000000001 1978.33333333335 1978.41666666668 1978.50000000002 1978.58333333335 1978.66666666668 1978.75000000002 1978.83333333335 1978.91666666668 1979.00000000002 1979.08333333335 1979.16666666668 1979.25000000002 1979.33333333335 1979.41666666668 1979.50000000002 1979.58333333335 1979.66666666668 1979.75000000002 1979.83333333335 1979.91666666668 1980.00000000002 1980.08333333335 1980.16666666668 1980.25000000002 1980.33333333335 1980.41666666669 1980.50000000002 1980.58333333335 1980.66666666669 1980.75000000002 1980.83333333335 1980.91666666669 1981.00000000002 1981.08333333335 1981.16666666669 1981.25000000002 1981.33333333335 1981.41666666669 1981.50000000002 1981.58333333335 1981.66666666669 1981.75000000002 1981.83333333335 1981.91666666669 1982.00000000002 1982.08333333336 1982.16666666669 1982.25000000002 1982.33333333336 1982.41666666669 1982.50000000002 1982.58333333336 1982.66666666669 1982.75000000002 1982.83333333336 1982.91666666669 1983.00000000002 1983.08333333336 1983.16666666669 1983.25000000002 1983.33333333336 1983.41666666669 1983.50000000002 1983.58333333336 1983.66666666669 1983.75000000002 1983.83333333336 1983.91666666669 1984.00000000003 1984.08333333336 1984.16666666669 1984.25000000003 1984.33333333336 1984.41666666669 1984.50000000003 1984.58333333336 1984.66666666669 1984.75000000003 1984.83333333336 1984.91666666669 1985.00000000003 1985.08333333336 1985.16666666669 1985.25000000003 1985.33333333336 1985.41666666669 1985.50000000003 1985.58333333336 1985.66666666669 1985.75000000003 1985.83333333336 1985.9166666667 1986.00000000003 1986.08333333336 1986.1666666667 1986.25000000003 1986.33333333336 1986.4166666667 1986.50000000003 1986.58333333336 1986.6666666667 1986.75000000003 1986.83333333336 1986.9166666667 1987.00000000003 1987.08333333336 1987.1666666667 1987.25000000003 1987.33333333336 1987.4166666667 1987.50000000003 1987.58333333337 1987.6666666667 1987.75000000003 1987.83333333337 1987.9166666667 198 8.00000000003 1988.08333333337 1988.1666666667 1988.25000000003 1988.33333333337 1988.4166666667 1988.50000000003 1988.58333333337 1988.6666666667 1988.75000000003 1988.83333333337 1988.9166666667 1989.00000000003 1989.08333333337 1989.1666666667 1989.25000000003 1989.33333333337 1989.4166666667 1989.50000000004 1989.58333333337 1989.6666666667 1989.75000000004 1989.83333333337 1989.9166666667 1990.00000000004 1990.08333333337 1990.1666666667 1990.25000000004 1990.33333333337 1990.4166666667 1990.50000000004 1990.58333333337 1990.6666666667 1990.75000000004 1990.83333333337 1990.9166666667 1991.00000000004 1991.08333333337 1991.1666666667 1991.25000000004 1991.33333333337 1991.416666666 71 1991.50000000004 1991.58333333337 1991.66666666671 1991.75000000004 1991.83333333337 1991.91666666671 1992.00000000004 1992.08333333337 1992.16666666671 1992.25000000004 1992.33333333337 1992.41666666671 1992.50000000004 1992.58333333337 1992.66666666671 1992.75000000004 1992.83333333337 1992.91666666671 1993.00000000004 1993.08333333338 1993.16666666671 1993.25000000004 1993.33333333338 1993.41666666671 1993.50000000004 1993.58333333338 1993.66666666671 1993.75000000004 1993.83333333338 1993.91666666671 1994.00000000004 1994.08333333338 1994.16666666671 1994.25000000004 1994.33333333338 1994.41666666671 1994.50000000004 1994.58333333338 1994.66666666671 1994.75000000004 1994.8333333 3338 1994.91666666671 1995.00000000005 1995.08333333338 1995.16666666671 1995.25000000005 1995.33333333338 1995.41666666671 1995.50000000005 1995.58333333338 1995.66666666671 1995.75000000005 1995.83333333338 1995.91666666671 1996.00000000005 1996.08333333338 1996.16666666671 1996.25000000005 1996.33333333338 1996.41666666671 1996.50000000005 1996.58333333338 1996.66666666671 1996.75000000005 1996.83333333338 1996.91666666672 1997.00000000005 1997.08333333338 1997.16666666672 1997.25000000005 1997.33333333338 1997.41666666672 1997.50000000005 1997.58333333338 1997.66666666672 1997.75000000005 1997.83333333338 1997.91666666672 1998.00000000005 1998.08333333338 1998.16666666672 1998.25000 000005 1998.33333333338 1998.41666666672 1998.50000000005 1998.58333333339 1998.66666666672 1998.75000000005 1998.83333333339 1998.91666666672 1999.00000000005 1999.08333333339 1999.16666666672 1999.25000000005 1999.33333333339 1999.41666666672 1999.50000000005 1999.58333333339 1999.66666666672 1999.75000000005 1999.83333333339 1999.91666666672 2000.00000000005 2000.08333333339 2000.16666666672 2000.25000000005 2000.33333333339 2000.41666666672 2000.50000000006 2000.58333333339 2000.66666666672 2000.75000000006 2000.83333333339 2000.91666666672 2001.00000000006 2001.08333333339 2001.16666666672 2001.25000000006 2001.33333333339 2001.41666666672 2001.50000000006 2001.58333333339 2001.666 66666672 2001.75000000006 2001.83333333339 2001.91666666672 2002.00000000006 2002.08333333339 2002.16666666672 2002.25000000006 2002.33333333339 2002.41666666673 2002.50000000006 2002.58333333339 2002.66666666673 2002.75000000006 2002.83333333339 2002.91666666673 2003.00000000006 2003.08333333339 2003.16666666673 2003.25000000006 2003.33333333339 2003.41666666673 2003.50000000006 2003.58333333339 2003.66666666673 2003.75000000006 2003.83333333339 2003.91666666673 2004.00000000006 2004.0833333334 2004.16666666673 2004.25000000006 2004.3333333334 2004.41666666673 2004.50000000006 2004.5833333334 2004.66666666673 2004.75000000006 2004.8333333334 2004.91666666673 2005.00000000006 2005.08333 33334 2005.16666666673 2005.25000000006 2005.3333333334 2005.41666666673 2005.50000000006 2005.5833333334 2005.66666666673 2005.75000000006 2005.8333333334 2005.91666666673 2006.00000000007 2006.0833333334 2006.16666666673 2006.25000000007 2006.3333333334 2006.41666666673 2006.50000000007 2006.5833333334 2006.66666666673 2006.75000000007 2006.8333333334 2006.91666666673 2007.00000000007 2007.0833333334 2007.16666666673 2007.25000000007 2007.3333333334 2007.41666666673 2007.50000000007 2007.5833333334 2007.66666666673 2007.75000000007 2007.8333333334 2007.91666666674 2008.00000000007 2008.0833333334 2008.16666666674 2008.25000000007 2008.3333333334 2008.41666666674 2008.50000000007 2008.5833333334 2008.66666666674 2008.75000000007 2008.8333333334 2008.91666666674 2009.00000000007 2009.0833333334 2009.16666666674 2009.25000000007 2009.3333333334 2009.41666666674 2009.50000000007 2009.58333333341 2009.66666666674 2009.75000000007 2009.83333333341 2009.91666666674 2010.00000000007 2010.08333333341 2010.16666666674 2010.25000000007 2010.33333333341 2010.41666666674 2010.50000000007 2010.58333333341 2010.66666666674 2010.75000000007 2010.83333333341 2010.91666666674 2011.00000000007 2011.08333333341 2011.16666666674 2011.25000000007 2011.33333333341 2011.41666666674 2011.50000000008 2011.58333333341 2011.66666666674 2011.75000000008 2011.83333333341 2011.91666666674 2012.00000000008 2012.08333333341 2012.16666666674 2012.25000000008 2012.33333333341 44.1 43.8 43.5 43.1 43.1 43.1 43.3 43.4 43.4 43.3 43.3 43.9 44.1 44.6 45 45.1 45.5 45.6 45.7 45.9 46.1 46.4 46.5 47.1 47.5 48.1 48.5 48.8 49 49.4 49.7 50.4 50.9 51.4 51.9 52.5 52.8 53 52.9 52.7 52.6 52.5 52.2 51.7 51.5 51.4 51.2 50.6 50.3 49.9 49.8 49.2 48.9 48.4 47.9 47.1 46.2 45.6 44.9 44.1 43.7 43.6 43.5 44 44.3 44.7 45.1 45.3 45.4 45.8 46 46.2 46.9 47.6 47.8 48 48.4 48.5 49 49.2 49.5 49.6 50.1 50.6 50.6 50.9 51.6 51.8 52.1 52.4 52.5 52.7 52.8 52.9 53.1 53.2 52.8 53.2 53.6 54.3 54.5 54.8 54.7 55 55.2 55.3 55 55.1 54.7 54.7 55.2 54.2 54.6 54.3 53.9 53.6 53.4 52.9 52.3 51.9 51.8 51.6 50.4 48.9 48.3 48.5 48.9 49.3 49.7 50.1 50.1 49.9 49.2 48.9 49.1 49.3 49 48.6 48.2 48 47.4 47 46.8 46.7 46.2 46.5 46.3 46.3 46.1 45.8 45.9 45.6 45.9 46.1 46.3 46.7 47.5 48 48.6 49 49.7 50.4 50.9 51.1 51.7 52.4 52.7 53.3 53.9 54.4 54.4 54.6 55.1 55.2 55.3 55.2 55.2 55.3 55.8 56.1 56.5 56.9 57 57 57.3 57.7 57.9 58.1 58.4 58.4 58.7 58.9 59.2 59.4 59.4 59.8 60 60.5 60.4 60.5 60.8 60.9 61.1 61.6 61.6 62.1 62.2 62.3 62.4 62.8 63.1 63.2 63.6 63.7 63.5 63.5 63.6 64.3 64.7 64.7 64.9 65.3 65.3 65.5 65.6 65.9 66 66.1 66.2 66.1 65.6 65.8 65.6 65.6 65.1 65.5 65.5 65.2 65.3 65.4 65.3 65.1 65.1 64.8 64.8 64.9 64.6 63.8 63 62.2 61.2 60.7 60 59.8 59.6 60.2 60.6 60.7 61.4 61.5 61.9 62 61.9 61.8 62.3 62.5 63.1 63.6 64.1 64.5 64.7 65 65.2 65.4 66 66.9 67.3 67.8 67.7 68.3 68.4 68.6 68.7 69.2 69.5 69.8 70.2 71.2 71.1 71.3 72.4 72.8 73.3 73.9 74.2 74.9 75.3 75.9 76.2 76.7 77 77 76.9 77 77 77 77.1 77.5 77.8 77.7 77.7 77.8 76.5 77.4 77.6 78.1 78.7 79.2 79.2 79.5 79.8 80 80.6 80.7 81.3 82.3 82.7 82.8 83.5 84.1 85.1 85.2 85.9 86.3 86.5 87 87 87.9 88.1 88.1 88.5 88.1 88.4 88.6 88.1 87.8 88.1 88.4 88.3 89 89.1 89.2 89.7 90 90.4 90.7 90.8 91.2 91.8 92.6 93.3 92.8 93.7 93.8 93.1 93.3 93 92.5 92.8 92.1 91.4 90 89.6 88.6 87.4 86.6 86.9 86.4 86.3 86.2 84.7 84.2 84.7 85.5 85.5 86.3 86.7 87.3 88.2 88.5 88.1 88.3 88 88 88.5 88.5 88.8 88.5 88.5 88.2 89.2 89.9 90.3 90.9 92 93.1 94.1 95.1 96 96.9 98.3 98.5 99.3 99.7 100.4 101 101.6 101.9 102.7 103.8 104.2 104.8 104.6 105.2 105 105.8 105.9 106.6 106 106.4 107 107.2 108.1 108.2 108.5 107.9 107.4 107.5 107 106.7 106.7 106.5 106.4 107 106.7 106.8 107.1 106.9 107 106.7 106.6 106 105.4 104.8 103.9 103 101.9 101 99.5 99 98.1 97.5 95.4 94.1 92 89.2 86.8 84.5 82.9 81.8 80.4 80.7 81.1 81.7 82.4 83.1 83.7 84.3 85.2 86.3 86.8 86.9 88.4 88.9 89 88.9 89.1 89.2 89.7 89.8 90.5 91.7 91.8 92.7 93.7 93.7 94.2 94.2 94.4 93.7 93.2 93.8 94.1 94.5 94.6 95.3 95.6 95.5

Time horizons in macroeconomics
Long run
Prices are flexible, respond to changes in supply or demand.
Short run
Many prices are “sticky” at a predetermined level.
The economy behaves much differently when prices are sticky.

CHAPTER 10 Introduction to Economic Fluctuations

The material on this slide was introduced in Chapter 1, but it’s probably worth repeating at this point, especially since the behavior of prices is so critical for understanding short-run fluctuations.

It might also be worth reminding students that they (and most adults) are already aware of the concept of sticky prices. If they have a favorite beverage at Starbucks, ask if they can remember when its price was last increased. If they work, ask how long it’s been since their wage was last increased. Sticky prices are a fact of everyday life, even if most adults have not heard the term “sticky prices” or studied the implications of sticky prices for short-run economic fluctuations.

Recap of classical macro theory
(Chaps. 3-9)
Output is determined by the supply side:
supplies of capital, labor
technology
Changes in demand for goods & services
(C, I, G ) only affect prices, not quantities.
Assumes complete price flexibility.
Applies to the long run.

CHAPTER 10 Introduction to Economic Fluctuations

Classical macroeconomic theory is what students learned in Chapters 3–9. This slide recaps an important lesson from classical theory, which stands in sharp contrast to what we are about to cover now.

When prices are sticky…
…output and employment also depend on demand, which is affected by:
fiscal policy (G and T )
monetary policy (M )
other factors, like exogenous changes in
C or I

CHAPTER 10 Introduction to Economic Fluctuations

Chapters 10–12 focus on the closed economy case.

In an open economy, the list of things that affect aggregate demand is a bit longer. (See Chapter 13.)

The model of
aggregate demand and supply
The 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 determined
Shows how the economy’s behavior is different
in the short run and long run

CHAPTER 10 Introduction to Economic Fluctuations

Aggregate demand
The aggregate demand curve shows the relationship between the price level and the quantity of output demanded.
For this chapter’s intro to the AD/AS model,
we use a simple theory of aggregate demand based on the quantity theory of money.
Chapters 10–12 develop the theory of aggregate demand in more detail.

CHAPTER 10 Introduction to Economic Fluctuations

The Quantity Equation as
Aggregate Demand
From Chapter 4, recall the quantity equation
M V = P Y
For given values of M and V,
this equation implies an inverse relationship between P and Y …

CHAPTER 10 Introduction to Economic Fluctuations

The downward-sloping AD curve
An increase in the price level causes a fall in real money balances (M/P ),
causing a decrease in the demand for goods & services.

Y
P

CHAPTER 10 Introduction to Economic Fluctuations

The textbook explains different ways of thinking about the AD curve’s slope.
Here’s one that uses the idea of the simple money demand function introduced in chapter 5 (M/P = kY, where k = 1/V):
An increase in the price level causes a fall in real money balances, and therefore a fall in the demand for goods & services (because the demand for output is proportional to real money balances according to the simple money demand function implied by the quantity theory of money).
Here’s an explanation of the AD curve slope that doesn’t refer to the simple money demand function:
An increase in P reduces real money balances. In order to buy the same amount of stuff, velocity would have to increase. But, by definition, velocity is constant along the AD curve. For simplicity, suppose V = 1. With lower real money balances (or, equivalently, the same nominal balances but higher goods prices), people demand a smaller quantity of goods and services.

Shifting the AD curve
An increase in the money supply shifts the AD curve to the right.

Y
P

AD1

AD2

CHAPTER 10 Introduction to Economic Fluctuations

For future reference (a bunch of slides later in this chapter), it will be useful to see how a change in M shifts the AD curve.

Page 295 discusses the shift. Here’s the idea: With velocity fixed, the quantity equation implies that PY is determined by M. An increase in M causes an increase in PY, which means higher Y for each value of P, or higher P for each value of Y.

Or: for a given value of P, an increase in M implies higher real money balances. In the simple money demand function associated with the quantity theory, the demand for real balances is proportional to the demand for output, so output must rise at each P in order for real money demand to rise and equal the new, higher supply of real balances M/P.

Or, if you prefer, just have your students take on faith that an increase in the money supply shifts the AD curve to the right for now, telling them that they will learn how this works in Chapters 11 and 12.

Aggregate supply in the long run
Recall from Chap. 3:
In the long run, output is determined by
factor supplies and technology

is the full-employment or natural level of output, at which the economy’s resources are fully employed.

“Full employment” means that
unemployment equals its natural rate (not zero).

CHAPTER 10 Introduction to Economic Fluctuations

Some textbooks also use the term “potential GDP” to mean the full-employment level of output.

The long-run aggregate supply curve

Y
P

LRAS
does not depend on P,
so LRAS is vertical.

CHAPTER 10 Introduction to Economic Fluctuations

Sometimes it takes students a little while to understand why the LRAS curve is vertical, when the supply curves they learned in their micro principles class were mostly upward-sloping.

Here’s an explanation they might find helpful:

“P” on the vertical axis is the economy’s overall price level – the average price of EVERYTHING. A 10% increase in the price level means that, on average, EVERYTHING costs 10% more. Thus, a firm can get 10% more revenue for each unit it sells. But the firm also pays an average of 10% more in wages, prices of intermediate goods, advertising, and so on. Thus, the firm has no incentive to increase output.

Another thought: We learn from microeconomics that a firm’s supply depends on the RELATIVE price of its output. If all prices increase by 10%, then each firm’s relative price is the same as before, so firms have no incentive to alter output.

Long-run effects of an increase in M

Y
P

AD1

LRAS

An increase in M shifts AD to the right.

In the long run, this raises the price level…

…but leaves output the same.

AD2

CHAPTER 10 Introduction to Economic Fluctuations

[The textbook does a fall in AD (Figure 10-8 on p.297); this slide does an increase.]

Notice that the results in this graph are exactly as we learned in Chapter 5: a change in the money supply affects the price level, but not the quantity of output. Here, we are seeing these results on a graph with different variables on the axes (P and Y), but it’s the same model.

Aggregate supply in the short run
Many 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 (SRAS) curve is horizontal:

CHAPTER 10 Introduction to Economic Fluctuations

The assumption that all prices are fixed in the short run is extreme. Chapter 14 derives the SRAS curve under more realistic assumptions.

Yet, the extreme assumption here is worth making.

The short-run response of output & employment to policies and shocks is the same (qualitatively) whether the SRAS curve is upward-sloping or horizontal. But the horizontal SRAS curve makes the analysis much simpler: a shift in AD leaves P unchanged in the short run. This greatly simplifies analysis in the IS-LM-AD model (Chapters 11 and 12).

(With an upward-sloping SRAS curve, a shock to the IS and AD curves would change prices in the short run in addition to changing output. The change in prices would change the real money supply, which would shift the LM curve.)

The short-run aggregate supply curve

Y
P

SRAS
The SRAS curve is horizontal:
The price level is fixed at a predetermined level, and firms sell as much as buyers demand.

CHAPTER 10 Introduction to Economic Fluctuations

Short-run effects of an increase in M

Y
P

AD1

In the short run when prices are sticky,…

…causes output to rise.

SRAS
Y2

AD2

…an increase in aggregate demand…

CHAPTER 10 Introduction to Economic Fluctuations

[The textbook (Figure 10-10 on p.298) does a decrease in AD, this slide does an increase.]

What about the unemployment rate? Remember from chapter 2: Okun’s law says that unemployment and output are negatively related. In the graph here, in order for firms to increase output, they require more workers. Employment rises, and the unemployment rate falls.

From the short run to the long run
Over time, prices gradually become “unstuck.” When they do, will they rise or fall?

rise
fall
remain constant
In the short-run equilibrium, if
then over time,
P will…
The adjustment of prices is what moves
the economy to its long-run equilibrium.

CHAPTER 10 Introduction to Economic Fluctuations

You might want to discuss the intuition for the price adjustment in each case.
First, suppose aggregate demand is higher than the full-employment level of output in the economy’s initial short-run equilibrium. Then, there is upward pressure on prices: In order for firms to produce this above-average level of output, they must pay their workers overtime and make their capital work at a high intensity, which causes more maintenance, repairs, and depreciation. For all these reasons, firms would like to raise their prices. In the short run, they cannot. But over time, prices gradually become “unstuck,” and firms can increase prices in response to these cost pressures.
Instead, suppose that output is below its natural rate. Then, there is downward pressure on prices: Firms can’t sell as much output as they’d like at their current prices, so they would like to reduce prices. With lower than normal output, firms won’t need as many workers as normal, so they cut back on labor, and the unemployment rate rises above the natural rate of unemployment. The high unemployment rate puts downward pressure on wages. Wages and prices are stuck in the short run, but over time, they fall in response to these pressures.
Finally: if output equals its normal (or natural) level, then there is no pressure for prices to rise or fall. Over time, as prices become “unstuck,” they will simply remain constant.

The SR & LR effects of ΔM > 0

Y
P

AD1

LRAS

SRAS
P2

A = initial equilibrium
A
B
C
B = new short-run eq’m after Fed increases M
C = long-run equilibrium

AD2

CHAPTER 10 Introduction to Economic Fluctuations

[The textbook does a decrease in aggregate demand, Figure 10-12 on p.300. This slide presents an increase in aggregate demand.]

This slide puts together the pieces that have been developed over the previous slides: the short-run and long-run effects, as well as the adjustment of prices over time that causes the economy to move from the short-run equilibrium at point B to the long-run equilibrium at C.

The economy starts at point A; output and unemployment are at their natural rates. The Fed increases the money supply, shifting AD to the right. In the short run, prices are sticky, so output rises. The new short-run equilibrium is at point B in the graph.

In order for firms to increase output, they hire more workers, so unemployment falls below the natural rate of unemployment, putting upward pressure on wages. The high level of demand for goods & services at point B puts upward pressure on prices.

Over time, as prices become unstuck, they begin to rise in response to these pressures. The price level rises and the economy moves up its (new) AD curve, from point B toward point C.

This process stops when the economy gets to point C: output again equals the natural rate of output, and unemployment again equals the natural rate of unemployment, so there is no further pressure on prices to change.

How shocking!!!
shocks: exogenous changes in agg. supply or demand
Shocks temporarily push the economy away from full employment.
Example: exogenous decrease in velocity
If the money supply is held constant, a decrease in V means people will be using their money in fewer transactions, causing a decrease in demand for goods and services.

CHAPTER 10 Introduction to Economic Fluctuations

[The example in the textbook is an exogenous INCREASE in velocity.]
The exogenous decrease in velocity corresponds to an exogenous increase in demand for real money balances (relative to income & transactions). This might occur in response to a wave of credit card fraud, which presumably would make nervous consumers more inclined to use cash in their transactions. If there’s an exogenous increase in real money demand (i.e., an increase NOT caused by an increase in Y), then M/P must increase as well; if the Fed holds M constant, then P must fall. Thus, the increase in real money demand causes a decrease in the value of P associated with each Y, and the AD curve shifts down.

The velocity shock is the only AD shock we can analyze at this point, because (for this chapter only) we have derived the AD curve from the quantity theory of money.

In the following chapters, students will learn on a deeper level about other AD shocks they may recall from their introductory course, such as: a stock market crash causes consumers to cut back on spending; a fall in business confidence causes a decrease in investment; a recession in a country with which we trade causes an exogenous decrease in their demand for our exports.

SRAS

LRAS

AD2
The effects of a negative demand shock

Y
P

AD1

AD shifts left, depressing output and employment
in the short run.
A
B
C
Over time, prices fall and the economy moves down its demand curve toward full employment.

CHAPTER 10 Introduction to Economic Fluctuations

Note the economy’s self-correction mechanism:
When in a recession, the economy—left to its own devices—fixes itself: the gradual adjustment of prices helps the economy recover from the shock and return to full employment.
Of course, before the economy has finished self-correcting, a period of low output and high unemployment is endured.

Supply shocks
A supply shock alters production costs, affects the prices that firms charge. (also called price shocks)
Examples of adverse supply shocks:
Bad weather 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.

CHAPTER 10 Introduction to Economic Fluctuations

CASE STUDY:
The 1970s oil shocks
Early 1970s: OPEC coordinates a reduction in the supply of oil.
Oil prices rose
11% in 1973
68% in 1974
16% in 1975
Such sharp oil price increases are supply shocks because they significantly impact production costs and prices.

CHAPTER 10 Introduction to Economic Fluctuations

Oil is required to heat the factories in which goods are produced, and to fuel the trucks that transport the goods from the factories to the warehouses to Walmart stores. A sharp increase in the price of oil, therefore, has a substantial effect on production costs.

SRAS1

Y
P

LRAS

CASE STUDY:
The 1970s oil shocks
The oil price shock shifts SRAS up, causing output and employment to fall.
A
B

In absence of
further price shocks, prices will fall over time and economy moves back toward full employment.

SRAS2
A

CHAPTER 10 Introduction to Economic Fluctuations

And, as output falls from Ybar to Y2 in the graph, we would expect to see unemployment increase above the natural rate of unemployment. (Recall from chapter 2: Okun’s law says that output and unemployment are inversely related.)

Note the phrase “in absence of further price shocks.” As we will see shortly, just as the economy was recovering from the first big oil shock, a second one came along.

CASE STUDY:
The 1970s oil shocks
Predicted effects
of the oil shock:
inflation #
output $
unemployment #
…and then a gradual recovery.

CHAPTER 10 Introduction to Economic Fluctuations

This slide first summarizes the model’s predictions from the preceding slide, and then presents data (from the text, p.305) that supports the model’s predictions.

CASE STUDY:
The 1970s oil shocks
Late 1970s:
As economy
was recovering,
oil prices shot up again, causing another huge supply shock!

CHAPTER 10 Introduction to Economic Fluctuations

Data source: See p.306 of the textbook.
This second shock was associated with the revolution in Iran. The Shah, who maintained cordial relations with the West, was deposed. The new leader, Ayatollah Khomeini, was considerably less friendly toward the West. (He even forbade his citizens from listening to Western music.)

CASE STUDY:
The 1980s oil shocks
1980s:
A favorable supply shock—
a significant fall in oil prices.
As the model predicts,
inflation and unemployment fell.

CHAPTER 10 Introduction to Economic Fluctuations

A few slides back, we analyzed the effects of an adverse supply shock. It might be worth noting that the predicted effects of a favorable supply shock are just the opposite: in the short run, the price level (or inflation rate) falls, output rises, and unemployment falls.

Looking at the graph: at first glance, it may seem that the fall in oil prices doesn’t occur until 1986. But remind students to look at the left-hand scale, on which 0 is in the middle, not at the bottom. Oil prices fell about 10% in 1982, and generally fell during most years between 1982 and 1986.

Stabilization policy
def: policy actions aimed at reducing the severity of short-run economic fluctuations.
Example: Using monetary policy to combat the effects of adverse supply shocks…

CHAPTER 10 Introduction to Economic Fluctuations

Chapter 18 is devoted to stabilization policy.

Stabilizing output with
monetary policy

SRAS1

Y
P

AD1
B
A
Y2

LRAS

The adverse supply shock moves the economy to
point B.

SRAS2

CHAPTER 10 Introduction to Economic Fluctuations

Stabilizing output with
monetary policy

Y
P

AD1
B
A
C
Y2

LRAS

But the Fed accommodates the shock by raising agg. demand.
results:
P is permanently higher, but Y remains at its full-employment level.

SRAS2

AD2

CHAPTER 10 Introduction to Economic Fluctuations

Note: If the Fed correctly anticipates the sign and magnitude of the shock, then the Fed can respond as the shock occurs rather than after, and the economy never would go to point B—it would go immediately to point C.

CHAPTER SUMMARY
1. Long run: prices 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 fluctuations

CHAPTER 10 Introduction to Economic Fluctuations

CHAPTER SUMMARY
3. The 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 10 Introduction to Economic Fluctuations

CHAPTER SUMMARY
6. 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.

CHAPTER 10 Introduction to Economic Fluctuations

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< YY = 1 P 2 P 4%6%8%10%12%0%10%20%30%40%50%60%70%19731974197519761977Change in oil prices (left scale)Inflation rate-CPI (right scale)Unemployment rate (right scale) graph--all years 1973 1973 1973 1974 1974 1974 1975 1975 1975 1976 1976 1976 1977 1977 1977 1978 1978 1978 1979 1979 1979 1980 1980 1980 1981 1981 1981 1982 1982 1982 1983 1983 1983 1984 1984 1984 1985 1985 1985 1986 1986 1986 1987 1987 1987 Change in oil prices (left scale) Inflation rate-CPI (right scale) Unemployment rate (right scale) 0.11 0.062 0.049 0.68 0.11 0.056 0.16 0.091 0.085 0.033 0.058 0.077 0.081 0.065 0.071 0.094 0.077 0.061 0.254 0.113 0.058 0.478 0.135 0.07 0.444 0.103 0.075 -0.087 0.061 0.095 -0.071 0.032 0.095 -0.017 0.043 0.074 -0.075 0.036 0.071 -0.445 0.019 0.069 0.183 0.036 0.061 data Source of data: pp.253-254 of Mankiw, Macroeconomics, 5th ed. d(OIL) dCPI u rate 1970 1971 1972 1973 11.0% 6.2% 4.9% 1974 68.0% 11.0% 5.6% 1975 16.0% 9.1% 8.5% 1976 3.3% 5.8% 7.7% 1977 8.1% 6.5% 7.1% 1978 9.4% 7.7% 6.1% 1979 25.4% 11.3% 5.8% 1980 47.8% 13.5% 7.0% 1981 44.4% 10.3% 7.5% 1982 -8.7% 6.1% 9.5% 1983 -7.1% 3.2% 9.5% 1984 -1.7% 4.3% 7.4% 1985 -7.5% 3.6% 7.1% 1986 -44.5% 1.9% 6.9% 1987 18.3% 3.6% 6.1% 4%6%8%10%12%14%0%10%20%30%40%50%60%19771978197919801981 Change in oil prices (left scale)Inflation rate-CPI (right scale)Unemployment rate (right scale) graph--all years 1973 1973 1973 1974 1974 1974 1975 1975 1975 1976 1976 1976 1977 1977 1977 1978 1978 1978 1979 1979 1979 1980 1980 1980 1981 1981 1981 1982 1982 1982 1983 1983 1983 1984 1984 1984 1985 1985 1985 1986 1986 1986 1987 1987 1987 Change in oil prices (left scale) Inflation rate-CPI (right scale) Unemployment rate (right scale) 0.11 0.062 0.049 0.68 0.11 0.056 0.16 0.091 0.01 0.033 0.058 0.077 0.081 0.065 0.071 0.094 0.077 0.061 0.254 0.113 0.058 0.478 0.135 0.07 0.444 0.103 0.075 -0.087 0.061 0.095 -0.071 0.032 0.095 -0.017 0.043 0.074 -0.075 0.036 0.071 -0.445 0.019 0.069 0.183 0.036 0.061 data Source of data: pp.253-254 of Mankiw, Macroeconomics, 5th ed. d(OIL) dCPI u rate 1970 1971 1972 1973 11% 6.20% 4.90% 1974 68% 11% 5.60% 1975 16% 9.10% 1% 1976 3.30% 5.80% 7.70% 1977 8.10% 6.50% 7.10% 1978 9.40% 7.70% 6.10% 1979 25.40% 11.30% 5.80% 1980 47.80% 13.50% 7% 1981 44.40% 10.30% 7.50% 1982 -8.70% 6.10% 9.50% 1983 -7.10% 3.20% 9.50% 1984 -1.70% 4.30% 7.40% 1985 -7.50% 3.60% 7.10% 1986 -44.50% 1.90% 6.90% 1987 18.30% 3.60% 6.10% 0%2%4%6%8%10%-50%-40%-30%-20%-10%0%10%20%30%40%198219831984198519861987 Change in oil prices (left scale)Inflation rate-CPI (right scale)Unemployment rate (right scale) graph--all years 1973 1973 1973 1974 1974 1974 1975 1975 1975 1976 1976 1976 1977 1977 1977 1978 1978 1978 1979 1979 1979 1980 1980 1980 1981 1981 1981 1982 1982 1982 1983 1983 1983 1984 1984 1984 1985 1985 1985 1986 1986 1986 1987 1987 1987 Change in oil prices (left scale) Inflation rate-CPI (right scale) Unemployment rate (right scale) 0.11 0.062 0.049 0.68 0.11 0.056 0.16 0.091 0.01 0.033 0.058 0.077 0.081 0.065 0.071 0.094 0.077 0.061 0.254 0.113 0.058 0.478 0.135 0.07 0.444 0.103 0.075 -0.087 0.061 0.095 -0.071 0.032 0.095 -0.017 0.043 0.074 -0.075 0.036 0.071 -0.445 0.019 0.069 0.183 0.036 0.061 data Source of data: pp.253-254 of Mankiw, Macroeconomics, 5th ed. d(OIL) dCPI u rate 1970 1971 1972 1973 11% 6.20% 4.90% 1974 68% 11% 5.60% 1975 16% 9.10% 1% 1976 3.30% 5.80% 7.70% 1977 8.10% 6.50% 7.10% 1978 9.40% 7.70% 6.10% 1979 25.40% 11.30% 5.80% 1980 47.80% 13.50% 7% 1981 44.40% 10.30% 7.50% 1982 -8.70% 6.10% 9.50% 1983 -7.10% 3.20% 9.50% 1984 -1.70% 4.30% 7.40% 1985 -7.50% 3.60% 7.10% 1986 -44.50% 1.90% 6.90% 1987 18.30% 3.60% 6.10% 1 P /docProps/thumbnail.jpeg

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