1. Chapter 9 Introduction to Economic Fluctuations
MACROECONOMICS
Chapter 9
Introduction to Economic Fluctuations

2. Short Run Fluctuations
What causes them?
Can policymakers avoid recessions?
Plan of the chapter
Data describing short run fluctuations
Difference between long run and short run
The basic model of AS-AD

3. Figure 9.1 Real GDP Growth in the United States Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers 3

5. Investments are much more volatile than consumption expenditures. 5
Figure 9.2 Growth in Consumption and Investment Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers 5

6. http://data. bls. gov/pdq/SurveyOutputServlet

7. Okun’s Law
%Δ in Y = 3% - 2(Change in Unemployment Rate from one year to another)
Sep 08 to Sep 09 unemployment went from 6.2% to 9.8%, 3.6% increase.
Predicted change in Y will be -4.2% 7

10. Why Different Time Horizons?10

11. Why Different Time Horizons?
In the long run prices are flexible; complete adjustment.
Money neutrality: changes in money supply does not affect real variables.
In the short run prices are sticky.
Real variables do respond to money in te short run.

12. Long Run In the long run, Y is determined with K, L, and technology.
In the long run all the resources are fully employed.
The long run Y is thus fixed.
The circular flow is in equilibrium because any shock is dealt with price adjustment.
How do you show the supply of output (Y) in a diagram where Y is the horizontal axis?

13. Figure 9.7 The Long-Run Aggregate Supply Curve Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers 13

14. Aggregate Demand
If money supply and velocity were given (fixed), then any change in the price level will have to be compensated by a change in Y to keep the nominal GDP fixed.
What happens to the AD, if
Money supply increases?
Money supply decreases?
Velocity increases (money demand decreases)?

15. Velocity increase will bring an outward shift.
Money demand increase will bring an inward shift.
Our aggregate demand theory will include all the
expenditures by consumers, businesses,
government, and the rest of the world in future chapters. 15

16. Long Run Adjustment 16

17. Short Run
Suppose no prices adjust in the short run; and when they do start to adjust, all the prices adjust slowly, together.
What will the short run aggregate supply curve look like this year? Next year?
How will the economy react in the short run to a shift in AD?
The equilibrium in the circular flow model is now achieved through output adjustment.

18. Figure 9.9 The Short-Run Aggregate Supply Curve Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers 18

19. Figure Shifts in Aggregate Demand in the Short Run Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers 19

20. Long and Short Run Equilibrium20

21. From SR to LR 21

22. From SR to LR There may be many reasons for an aggregate
demand increase.
The model in this
chapter will allow
us to either
increase the
velocity of money
or increase the
money supply.
Either one will
shift the AD to the
right. 22

23. An Adverse Supply Shock
A general increase
in union negotiated
wages; sudden
increase in the prices
of widely used inputs;
regulation that adds
up to costs; crop
failure…
STAGFLATION
initially but back at
the starting point in
the long run. 23

24. Accommodating an Adverse ShockNo
unemployment
increase but
permanent
increase in
the price level. 24