Part 1: Real Business Cycle Theory

What is the Short Run

• Some Prices like Wages, Rent or commodity prices do not fully adjust

• The economy is influenced by demand side shocks like changes in spending

What happens to prices in the short run

The do not respond immediatley to changes in supply and demand. his stickiness is due to things like wage contracts, lease agreements, minimum wage laws, and long-term commodity pricing contracts

What is the consequence of sticky prices

Demand tends to fall. This may be because a loss of consumer confidence increases uncertainty and decreases spending. There also may be a decrease in Income and so when people have lower incomes, they buy less good and services which reduces demand. Also high interest rates- which means borrowing becomes more expensive so consumers and businesses reduce spending and investment

What happens in the long run

Prices are flexible and fully adjust to changes in supply and demand, leading to a return to potential output levels.

What is a buisness cycle

A business cycle is a pattern of economic expansion (growth) and contraction (decline).

What is an expansion

Output (real GDP) increases, employment rises, incomes grow.

What is Output

Output refers to real GDP—total value of goods and services produced, adjusted for inflation.

When was the Great Recession

2007-2009

How did the Great Recession start

In the US, triggered by the the collapse of a housing bubble and financial system failures

How much did real GDP fall by during the recession

4.2 percent between Q4 2007 & Q2 2009

How much did unemployment increase by during the great recession

It rose from 4.8 percent to 9.3 percent

Which other areas did the recession spread to

other major economies such as United Kingdom and the Eurozone