ECON 313 Ch 8
– Peak: High point in economic activity. (P)
– Business Cycle Expansion: Period T to P. AKA Boom
– Business Cycle Contraction: Period P to T. AKA
– All prices fully adjust so that resources are fully utilized
– Determined by Tech, Capital, and Labor. (A, K, L)
– Shocks to the economy
– Hard to measure so estimates can be inaccurate
2. Changes components of index over time to improve history record
3. Uses real-time data at time is less accurate than revised data Leading variables
– Real Consumer pending and Investment:Procyclical and coincident. Investment more volatile.
– Unemployment: Countercyclical
– InflationL Procyclical and lagging
– Interest rate paid on short-term U.S. government bonds, known as Treasury bills, is both procyclical and lagging
– Differnece in interest rates between long-term and short-term government bonds is leading and pro cyclical, and good predictor of recessions
– Difference in interest rates on corporate bonds and government bonds in countercyclical. Companies a more likely to run out of money in recessions and thus have to pay higher interest rates for corporate bonds
– Global financial markets have become more integrated. US financial crisis in 2008 made other economies crash too
– John Maynard Keynes questioned the classical view that economies moved quickly to their long-run equilibrium
– Said we should primarily focus on the short-run. In the long run, we are all dead.
– Keynesians: Argue that the govt should pursue active policies to stabilize economic fluctuations
– Ex: Promot high long run economic growth such as keeping inflation low.
– They adjust all the way to their long-run equilibrium where supply equals demand
– Change in nominal variables such as inflation and the money supply have no effect on real varibles such as aggregate output (Real GDP), real interest, saving, or investment.
– Flexible price models that display classical dichotomy determine Real GDP only by the production function with labor and capital
– Keynesian Models: Model with Sticky Prices – Short run prices respond slowly to changes in supply and demand. Move to long-run equilibrium slowly.
– Assumes perfect competition in markets where buyers and sellers are price takers who only decision is how much to buy or sell. Equilibrium price will prevail over all others.
– Keynesians Model: Focuses on the importance of market (monopoly) power in a market with monopolistic competition as firms have the ability to set prices.
– Changing prices is a complex process that involves many hidden costs
– Collecting information is costly, so firms and households may engage in rational inattention by making decisions about prices only at infrequent intervals. Rational because reviewing pricing condition a few times a year because of time and effort
– Changing prices frequently may alienate customers.
– Staggered Price Setting
– Occurs when competitors adjust prices at different intervals, so that staggered prices slow down price adjustment
– Ex: Alan Blinder found that only 10% of firms changed their prices as often as once a week, and close to 40% changed prices once year and 10% less than once a year
– Can change % with inflation
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