Macroeconomics-Short-Run Economic Fluctuations

Indicator of a recession

real GDP declines for two consecutive quarters

National Bureau of Economic Research

non-profit organization of economists that has been a major source of research on short-term fluctuations in the economy

the Great Depression

real GDP fell by more than a quarter

Unemployment in the business cycle

rises during recessions, declines tend to lag behind the onset of the next phase of economic growth

Rate of inflation in the business cycle

accelerates during expansions, slows down during recessions

Potential output

quantity of goods and services an economy can produce when using its resources at normal rates

Output gap

difference between actual output and potential output; Y-Y*

Arthur Okun

one of JFK’s chief economic advisors

Okun’s Law

every one percent that the unemployment rate differs from the natural rate is associated with a two percent deviation in the output gap

Rate of growth of potential output

depends on the growth rate of the population, the rate at which capital stock increases, and changes in the pace of technological advances

Sticky prices

tendency of prices to remain constant in the short run

Aggregate demand

total desired spending on final goods and services, determines output in the economy

Long-run self-adjustment

in the long run, wage and price changes eliminate the gap between actual and potential output

John Maynard Keynes

British economist, created the Keynesian model

Keynesian theory

states that the causes of short-run fluctuations in the level of economic activity can be summarized in terms of the interaction between an aggregate demand and short-run aggregate supply curve

Aggregate demand curve

downward-sloping because of wealth effects, interest rate effects, and foreign exchange effects; shifts when the consumption and investment decisions made by economic actors changes

Aggregate supply curve

slops upward to reflect relationship between the price adjustment and the size of unanticipated sales; position depends on long-run potential output and people’s expectations on price level

Factors that shift the aggregate supply curve

input prices, tax policy, government regulations, new tech, changes to productivity, aggregate supply shocks

Fiscal policy

use of taxes and spending to influence aggregate demand and the level of overall economic activity