BUSINESS CYCLE & AGGREGATED DEMAND

Business cycles

Definition:

Economywide fluctuations in
total national output, income, and employment

Phases:

Recession

Recurring period of decline in total output,
income, and employment

Peak

Point where recessio starts

Expansion

Economy is moving out of recession

Trough

Point where expansion starts

Aggregate Demand

Definition:

Aggregate
quantity of output that is willingly bought at a
given level of prices

Product Sectors:

Consumption

Investment

(I) Spending includes purchases of buildings, software, and equipment

Government Purchases

(G) Like tanks and school books, the services of judges and public-school teachers.

Net Exports

(X) Which equal the value of exports minus the value of imports

Categories:

Policy Variables:

Monetary policy

The central bank can affect interest rates and other financial conditions

Fiscal Policy

Taxes and government expenditures

Exogeneous Variables:

Variables that are determined outside the AS-A framework.

The AD curve slopes downward

Business Cycle Theories

Exogeneus

Factors outside the economic
system

EXAMPLES:

Wars, revolutions, and elections;
in oil prices, gold discoveries, and population migrations

Internal

Look for mechanisms
within the economic system itself.

Multiplier Model

What is it?

Macroeconomic
theory used to explain how output is
determined in the short run.

Simples Multiplier

Equals to:

Is numerically = 1/(1 MPC)

Key points:

Basic multiplier
model emphasizes the importance of shifts in AD in affecting output and income

Equilibrium

Definition:

Is a situation where the different forces at work are in balance.

Disequilibrium

Definition:

Disequilibrium is when external forces cause a disruption in a market's supply and demand equilibrium

Allocational role of fiscal policy

What are they?

Government tax and
spending programs

The total expenditure curve (TE)

What it does?

Shows the level
of expenditure desired or planned by consumers and
businesses