Chapter 26 Macroecon 2013 IRSC

Business Cycle

Currently identifies a recession as a phase of the cycle

Real GDP

A measure of economic output that corrects for price changes (inflation or deflation) to show actual growth

Nominal GDP

A measure of economic output that uses current prices it does not account for inflation

Unemployment

A key economic indicator

Inflation

An increase in the overall level of prices within an economy

The standard of living is measured by

Output per person (there was virtually no growth in living standards prior to the industrial revolution)

Characteristics of Modern Growth

Rising Output, Global Inequality

Rising Output

Characterized by a consistent rise in output per person

Global Inequality

Modern economic growth is not experienced by all countries it occurs unevenly across the globe

Saving

The international trade-off of current consumption for future consumption. Occurs when current income exceeds current spending

Types of investments

Financial and Economic

Financial Investment

Buying Stocks, bonds, or mutual funds (Financial assests)

Economic Investment (Real Capital goods)

Purchasing machinery, constructing buildings, or expanding inventory)

Economic Shocks

An unexpected shift or deviation from what was forecasted. Shocks occur when reality fails to match expectations.

Demand Shocks

Sudden, unexpected alterations in consumer spending or aggregate demand

Supply Shocks

Unexpected events affecting production capabilities, resource availability, or aggregate input costs

Price stickiness measures

how slowly a price responds to shift in economic behavior

Demand Shocks and Flexible Prices

If prices move freely, the market corrects itself quickly through price changes rather than output changes

Demand Shocks and Fixed (Sticky prices)

Most final goods cannot change prices instantly due to contracts or market friction

Demand Shock Flexible Prices (Positive)

Unexpectedly high demand drives prices upward, production quantity remains relatively constant

Demand Shock Fixed Prices (Positive)

Since prices cannot rise, firms must increase production and hire more workers to meet demand

Demand Shock Flexible Prices (Negative)

Unexpectedly low demand focuses prices downward firms clear inventory

Demand Shock Fixed Prices (Negative)

Since prices cannot fall, goods go unsold, causing unintended inventory

Flexible Prices

Corn Oil Natural Gas

When demand shocks lead to recessions, it is mainly due to

price inflexibility.

There is a trade-off between

current consumption and future consumption.

The term "shock"

does not tell us whether what has happened is unexpectedly bad or unexpectedly good

The average number of months between price changes for gasoline is

0.6.

Inventories held by firms

tend to reduce the severity of short-run fluctuations.