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Chapter 8: Business cycles - Coggle Diagram

- - - - Goods prices fixed in short run; wages flexible.
      - Vertical labor demand curve (determined by output demand). The wage-inelastic labour demand curve 𝑁𝑑(𝑌) is determined using the production function 𝑌 =𝑧(𝐾,𝑁) to find what level of employment 𝑁 is needed to produce output 𝑌 sufficient to meet demand "wage inelastic" outcome for employment 𝑁 is directly determined by the position of 𝑁𝑑(𝑌). For wages w
    - - id D↑ the firm is more able to sell at the same price P so hires more labour to meet demand, only if MPn ≤ w
    - - we have to produce to the left (at the capacity of the economy)
    - - Yd curve: Y= C+I+G
      - MM: r=r+ϕ(π−π)
  - - - Interest Rate Channel: Lower r → cheaper borrowing → ↑I, ↑C.
        
        this would have MM shift down Y increase hence Nd inc
  - - - negative news about the future hence a decline in C, I "fall in TFP"
      - worsen of credit market imperfections rl is higher so C↓
      - fiscal austerity meaning a ↓G
    - - goods:
        lower 𝐶𝑑 and 𝐼𝑑 and shifts the 𝑌𝑑 curve to the left, MM line is in the same position, r remains the same while Y declines
      - Labour:
        lower Y reduces labour demand Nd thus shifts left hence lower N because of the negative wealth effect of a lower z' the Ns shifts right ( if flexible wages that would mean a fall of w in rigid that would mean higher U)
      - the average labour productivity would rise
  - - - The economy has inefficiently low employment and production if 𝑀𝑃𝑁 > MRSl,c because the value of people’s time is less than the value they put on the extra goods that can be produced and consumed if there were more economic activity.
    - - wages are not felxible + ignores monetary frictions
    - - The policy intervention thus neutralises the negative consequences of slow price adjustment following a shock.
      - In case of a -ve shock to the economy that would shift all the CB could counteract this through reducing the i in order to reduce the output gap
      - To implement this optimal monetary policy, the central bank needs to know the natural rate of interest 𝑟𝑟∗. This is a practical problem because 𝑟𝑟∗ is not directly observable and needs to be estimated
- - - - monetary policy ineffective
        
        bec RBC assumes flexible prices so MP has little effect on real variables like Y and N
      - Fisacl policy ineffective
        
        the gov't can raise G but this will force people to work more even with low productovity hence reducing the overall efficiency
- - - - ‘strategic complementarity’ a situation where one person’s desire to perform an action increases when others are also performing the same action here when one firm hires more workers when others are also hiring
    - - Good
        
        High C,W & productivity andl is low
      - Bad
        
        low C, W & productivity and l is high