Economic fluctuations- short run

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What part of AD causes a recession

investment- it is the most volatile

consumption continues even during a recession

what is Okuns law

there is a negative relationship between unemployment and GDP

as people make goods and services, when unemployment is low, more people are producing things and GDP is high

when unemployment is high, less people are making things and thus GDP is low.

what are the figures around Okuns law

if unemployment is unchanged, then GDP will sit at around 3%

if unemployment falls, of every 1 percentage point it falls, GDP will fall by 2 percentage points.

thus meaning that GDP fluctuations are only caused by

changes in labour utilisation

Long run growth however is caused by

technological process, not unemployment changes.

Price behaviour short run v long run

• in the long run, prices are flexible and adjust to supply and demand

• in the short run prices are sticky and thus adjust slowly

so, if there was a 5% fall in the money supply, what would happen in the short run and long run

• in the short run, Prices do not fully adjust- menu costs, wages etc. real variables such as output and unemployment change

• in the long run, everything falls by 5%. and due to the classic dichotomy, real factors are completely uneffected.

in the classical model- what’s the formula for the long run AS

Y= F( K,L)

(with Y, K and L fixed)

again, this is a production function as real factors set output in the long run. wha

what is the main thing that causes a shift in AD

An increase or decrease in the Money supply

what impact does that have in the long run and short run

short run- creates temporary growth- as already discussed

long run- does not create growth- instead just changing real factors

why does it make sense for SRAS to be perfectly elastic>? and what does it mean

its because prices are sticky- meaning that a perfectly elastic line is draw at the set price level.

this means that a shift in AD, only impacts output, not price level

this can happen- in an extreme case

what is it like in reality and why

it is upward sloping, because some prices are sticky, where as others are flexible.

what are the majority of shifts caused with examples

shocks

SRAS shock- negative -war in ukraine, OPEC

positve- tech breakthrough, ai, oil price drop

AD shock- negative- pandemic

positive- sudden tax cut.

what do negative supply side shocks cause

stagflation- increases unemployment whilst causing inflation.