1. 1 Chp. 8: Business Cycles Focus: What is business cycle? Characteristics of Business Cycles Stylized facts about business cycles

2. 2 Business cycle refers to fluctuations in aggregate economic activity. Characteristics of Business Cycle: Recurrent but not periodic Persistent Co-movement: A number of variables move together.

3. 3 Variables which move in the same direction as the aggregate economic activity are called procyclical. Example- Industrial Production, Consumption, Investment, Trade Balance, Employment, Average Labor Productivity Inflation, Nominal Interest Rate Variables which move in the opposite direction to the aggregate economic activity are called countercyclical. Example- Unemployment Rate Variables which do not show any pattern over business cycle are called acyclical. Example- Real Wage, Real Interest Rate

4. 4 Variables which move in advance of aggregate economic activity are called leading variables. Example – Inventory Investment, Trade Balance, Money Growth, Average Labor Productivity, Stock Prices Variables which move after the aggregate economic activity are called lagging variables. Example – Inflation, Nominal Interest Rate Variables which move at the same time as the aggregate variables are called coincident variables. Example – Consumption, Unemployment, Employment

5. 5 AD-AS Model AD (Aggregate Demand) curve relates price level (P) to aggregate demand. It is downward sloping. AS (Aggregate Supply) curve relates price level (P) to aggregate supply. Long Run AS curve is vertical at full employment level of output. Short Run AS curve is horizontal implying that in the short-run price is fixed (Keynesian notion).