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SHORT-RUN ECONOMIC FLUCTUATIONS - Coggle Diagram
SHORT-RUN ECONOMIC FLUCTUATIONS
THE BUSINESS CYCLE
An economy´s output and unemployment rate fluctuate over the business cycle
output:
Real GDP
Unemployment rate(U)
: percentage of the labor force without jobs
The business cycle is made up of short-run movements in output and unemployment
Long-run output and unemployment
The normal level of output is called potential output, and the normal unemployment rate is the natural rate. These variables are also called the long-run levels of output and unemployment
Potential output (Y*)=
is the normal level of output that an economy is able to produce
narural rate of unemployment (U*)=
Normal or average level of unemployment
output fluctuations
Economic boom:
period when actual output exceeds potential output
Recession:
period when actual output falls below potential output
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unemployment fluctuations
Okun´s law:
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FLUCTUATIONS IN THE INFLATION RATE
Expected inflation
Link Title
what determines expected inflation?
Adaptative expectations=
also known as backward-boking expectations- expectations are not based on all available information
https://economipedia.com/definiciones/expectativas-adaptativas.html
Rational expectations=
The classical theory of asset prices assumes rational
expectations about firms’earnings.This means that expectations are the
best possible forecasts based on all available information.
https://economipedia.com/definiciones/expectativas-racionales.html
The phillips curve
https://youtu.be/H_LHFs_Htak
The phillips curve with adaptative expectations
is the change in inflation rate
unemployment phillips curve with adaptative expectations
NAIRU=
supply shock=
event that causes a major change in firm´s production costs, which in turn causes a short-run change in the inflation rate
Link Title
LONG-RUN MONETARY NEUTRALITY
principle that monetary policy cannot permanently affect real variables
The neutral real interest rate (r^n)=
the real interest rate that makes output equal potential output, given the aggregate expenditure curve
Hysteresis=
theory that the short-run of a variable such as unemployment affects its long-run level, such as the natural rate of unemployment
https://youtube.com/shorts/mD-_VQr-9rU?feature=share
What determines aggregate expenditure
Consumption (C)
Investment (I)
Government purchases (G)
Net exports (NX)
consumption multiplier
effect of income on consumption that magnifies changes in aggregate expenditure
The aggregate expenditure curve
monetary policy and equiibrium output
Expenditure shock
Types of expenditure shocks
Government spending
Taxes
Consumer confidence
New thechnologies
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Equilibrium outptut
depends on the AE curveand the central bank´s choice of the real interest rate
Counter cyclical monetary policy
adjustments of the real interest rate by the central bank to offset the expenditure shock
the negative short-run relationship between the real interest rate and output
The complete economy
aggregate expenditure/phillips curve (AE/PC) model=
theory of short-run economic fluctuations that assumes a negative relationship between the interest rate and output, and a positive relationship between output and inflation(Phillips curve)
A rise in the real interest rate=
policymarkers can reduce inflation by raising the real interest rate, but at the cost of reducing output in the short run
An expenditure shock=
assuming the central bank keeps the real interest rate constant, output raises above potential
Accomodative monetary policy=
decision by the central bank to adjust the interest rate constant when a supply shock occurs
nonaccomodative monetary policy=
decision by the central bank to adjust the interest rate to offset a supply shock and keep inflation constant
the economy over time
A rise in the real interest rate=
the phillips curve implies that inflation is constant over time
an adverse supply shock=
the central bank keeps the interest rate constant despite the shock
