Things that will actually help me during exam ECON 402

Investment is ______ than GDP

much more

Consumption is _____ volatile than GDP

much less

Basic Business Cycle Facts: Expenditures
Consumption
Volatility: ____

Co-movement: _____
Phase shift: _____

Less volatile
Pro-cyclical
Neither

Basic Business Cycle Facts: Expenditures
Investment
Volatility: ____

Co-movement: _____
Phase shift: _____

More volatile
Pro-cyclical
Neither

Basic Business Cycle Facts: Inputs
Hours per worker
Volatility: ____

Co-movement: _____
Phase shift: _____

Less volatile (1/3)
Pro-cyclical
Neither

Basic Business Cycle Facts: Employment
Hours per worker
Volatility: ____

Co-movement: _____
Phase shift: _____

Less volatile (2/3)
Pro-cyclical
Slight Lag

Basic Business Cycle Facts: Employment
Capital

Co-movement: _____
Phase shift: _____

Pro-cyclical,

1 year lag

Basic Business Cycle Facts: Employment
Output per worker

Co-movement: _____
Phase shift: _____

Pro-cyclical
Neither

Capital lags output:

It takes time to build factories/machinery.

Employment Lag Explained

• Firms seem to respond to an increase in demand

by first asking existing workers to work longer

hours.

• After about three months, they hire more worker

Real wages co-movement

Acyclical (neither pro nor counter cyclical

Unemployment co-movement

Counter cyclical

The “Long Run”

• All inputs are flexible

• All prices are flexible

• Capital accumulation

• Technological progress

Short Run:

• Only labor is flexible

• Capital and technology are fixed

• Some prices (wages) are fixed

Quantity of Money in the economy is related to

number of dollars exchanged in transactions

“Equation of Exchange”:

Mtvt = PtYt

Where M

money supply

Mtvt = PtYt

Where P

aggregate price level

Mtvt = PtYt

Where Y

real output

Mtvt = PtYt

Where v

velocity of money: average number of times each dollar is spent

The Quantity Theory of Money

The price level(P) and the rate of inflation(\pi) are ultimately determined by changes in the level and growth rate of the money (M)supply

The central bank controls the money supply, has ultimate control over the rate of inflation.

The Quantity Theory of Money: Assumptions

1. Real GDP is independent of M and P

2. Velocity is constant
   

The Quantity Theory is a good theory of inflation for ____ run but NOT ____ run

long, short

Hyperinflation is when inflation is greater than __

50

What causes hyperinflation?

• Hyperinflation is caused by excessive money

supply growth.

• When the Central Bank prints money, the price

level rises.

• If it prints money rapidly enough, the result is

hyperinflation.

Aggregate Demand (AD

relationship between

quantity of output demanded and the aggregate

price level

Aggregate demand formula

Shifts in Aggregate Demand:
Changes in money supply / velocity:

• Increase M or Increase V𝑣→ AD

• ↓ 𝑀 or ↓ 𝑣→ AD↓