INTRO MACRO-MST

What does potential output reflect

the amount produced when using resources at their normal capacity (natural productive capacity). it reflects underlying supply side factors

What do we want from a business cycle theory

• we want a conceptual framework that identifies

  • key shocks hitting economy

  • propogation mechanisms: who the shows transmit to the economy and affect labout etc.

Keynes business cycle theory

• Says say’s law doesn’t still work at macro level

• Can have economy wide failure due to lack of demand 

  • Animal spirits: confidence

• Demand side interventions are necessary to stabilize business cycle fluctuations

Assumptions of keynesian theory

ASSUMPTIONS

• Assumes prices are sticky and that prices and wages don’t fully adjust in the short run 

CONTRIBUTIONS

• Output can be based on demand (producing what people want) in the short run

• Highlights important of expectations, confidence and ‘animal spirits’

IMPLICATIONS

• Recessions can be fought by demand stimulating policies

what does planned investment show

firms confidence in investing, occurs independent of income more based on perception of news