Business cycles

To talk about fluctuations you need a benchmark

Potential output- level of of output is output you would get if all the economies resources are deployed in most efficient allocation

Potential output

Potential output is like at normal utilization rates, IT IS NOT THE MAXIMUM LEVEL OF OUTPUT OF an ECONOMY this is determined by supply side factors

supply side factors

activities that determine the economy;s productive capacity (labor, physical capital, technology, natural resources, human capital

Output gap

The percentage deviation from actual output

Business cycle

The business cycles is fluctuations between the level of the potenial output, understanding the potential fluctuations.

Very hard to predict, hard maginituded, irregular timing and duration

Recessionary Gap

Negative output gap, econmy is producing less than its potential: workers cant find jobs, physcial capital is underused

Inflationry gap

Positive output gap, economy is producing more than its potential (expansion or boom), Unsustainable intensity only possible for a short while

Multplier model

Understand the short fun flucuations

-prices are fixed, prices do not move

• only in the long run do they adjust

In the short run

Prices are sticky, firms take a long time to adjust prices in the economy-

GDP changes because of changes in demand-side factors

firms respond to changes in demand by adjusting their production rather than their prices. Producers will supply as many goods and services as buyers are willing to purchase. If demand increases firms will increase their production to meet thid extra demand TLDR firms adjust production qty not price

What does the multiplier model state

Small changes in demand lead to huge changes in production-

more spending leads to more production as producers meet demand

more production leads to more income

more income leads to spending

and the cycle continuues… where does it stop?

MPC

Marginal propencity to consume, basically how much of the dollar do you consume and how much do you end up saving

1-MPC is equal to the marginal propensity to save

Autonomous consumption

Any consumption that is not related to income no matter what that is ur consumptuion, any change in consumption that is not related to income or mpc or even taxes is going to enter into C, like a higher interest rate, which is part of the autonomous consumption