Business cycle - Long-run economic growth and the short-run fluctuations in output and employment

Recession - Output + living standards decline

Performance + policy

• Real gross domestic product - Measures the value of final goods and services produced within the borders of a given country during a given period of time, typically a year

• Nominal GDP - The dollar value of all goods and services produced within the borders of a given country using their current prices during the year that they were produced

  • Fisher Equation of Nominal GDP = Real GDP + Inflation

• Unemployment - The state a person is in if he or she cannot get a job despite being willing to work and actively seeking work

• Inflation - Increase in overall level of prices

Modern economic growth - Output per person rises as compared with earlier times in which output (but not output per person) increased

Savings, investment, + choosing b/w present + future consumption

• Savings - Generated when current consumption is less than current output

• Investment - When resources are devoted to increasing future output

• Financial investment - Purchase of assets in the hope of reaping financial gain

• Economic investment - Creation + expansion of business enterprises

Banks collect household savings + lend funds to businesses

Uncertainty, expectations, + shocks

• Expectations have large effect on investment + economic growth

• Shocks - Situations in which firms were expecting one thing to happen but then something else happened

• Demand shocks - Unexpected changes in demand for goods + services

  • Causes short-run fluctations

• Supply shocks - Unexpected changes in supply of goods + services

Demand shocks + sticky prices

• Many prices are inflexible + unable to change rapidly

• Inventory - Store of output that has been produced but not yet sold

• Demand falls → Firms that produce will be forced to cut production (vice versa)

Inflexible (sticky) prices - Prices that cannot change rapidly in response to changes in demand

• Flexible prices - React within seconds to changes in supply + demand

• Consumers prefer stable + predictable prices

Economy behaves differently based on how much time has passed after demand shock

• Fully flexible prices in long run