Macroeconomic Framework

Long-Run Economic Behavior  Potential GDP : trend GDP  Determined by productivity & normal trend in hours worked  Factors affecting productivity are the major determinants of long-run economic growth  human capital, physical capital, technology  Short-run economic growth fluctuates around its long-run trend

Short-Run Economic Behavior  Driven by changes in spending  Firms adjust production to meet the demands of customers  Factors that affect spending impact short-run economic growth

Unit Labor Costs  Unit labor cost : compensation per hour/productivity  Impacted by strength of the job market (unemployment vs. NAIRU)  Plays a significant role in affecting:  inflation  corporate profits  competiveness

Financial Panics  Typically involves a significant accumulation of debt during an asset bubble followed by a crash  Results in the need for deleveraging (reducing private debt)  Different from normal recession  More severe and has lasting effects