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week#10 (expansion fiscal policy shock (IS CURVE shift right, if nothing…
week#10
expansion fiscal policy shock
IS CURVE shift right, if nothing happened to the full employment level of output, price will adjust upward.
a model of growth
business cycle: switching from high growth periods to low growth periods.
low growth periods are called recessions.
why do recession occur?
real shocks: production function, labour force, fiscal policy, consumption &saving decision.
nominal shock: shock to money supply or money demand
extremely deep and prolonged recessions are called depressions
a simple model of growth
steady state
output per worker, consumption per worker, capital per worker and stock per worker are constant.
total output, consumption and capital are all growing at the same rate as the Labour rate
investment per worker
the saving rate defines a unique steady state capital-labour ratio K*
at K*,the amount that people choose to save will just equal the amount of investment necessary to keep capital per worker
k > k*, the amount of saving will be less than needed to keep the capital-labour ratio constant
k < k*, the amount of saving will be more than needed to keep the capital-labour ratio constant
economics that have capital-labour ratio that are far below the steady state level will experience faster rates or growth than economies that are near the steady state
poor countries should grow faster than wealthy countries since poor tend to have extremely low capital-labour ratio
economics may have different steady states (poor countries might be at their current steady state)
different countries have different total factor productivity parameters (technology and educational attainment)
poor countries tend to have much higher population growth rates
households in poor countries tend to save a lower proportion of their income
poor countries do not have well developed financial market that allow for the easy transfer of household saving to firms for investment purposes
increase in the capital-labor ratio
raises the amount of output each worker can product
increase the amount of output per worker that must be devoted
business cycle are primary the result of productivity shock. At increase over times.
development of new product or services
new management techniques
changes in the quality of capital or labour
changes in the availability of raw materials or energy
change in government regulation