Click here to load reader

Winter Semester 2011Alexander Fink, Institut für Wirtschaftspolitik1 Universität Leipzig Introduction to Economics Lecture 9: Business Cycles Alexander

  • View
    214

  • Download
    2

Embed Size (px)

Text of Winter Semester 2011Alexander Fink, Institut für Wirtschaftspolitik1 Universität Leipzig...

  • Slide 1

Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik1 Universitt Leipzig Introduction to Economics Lecture 9: Business Cycles Alexander Fink, PhD Slide 2 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik2 Overview Characteristics of short-run fluctuations Differences between short-run and long-run economic developments Model of short-run fluctuations building on aggregate demand and aggregate supply Slide 3 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik3 Short-Run Economic Fluctuations A recession is a period of declining real incomes, and rising unemployment. A depression is a severe recession. Slide 4 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik4 Short-Run Economic Fluctuations Output Y Time t Output with full employment Currrent output Boom Recession The Business Cycle Slide 5 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik5 Three Key Facts About Economic Fluctuations Economic fluctuations are irregular and unpredictable. Fluctuations in the economy are often called the business cycle. Most macroeconomic variables fluctuate together. As output falls, unemployment rises. Slide 6 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik6 2008 Schffer-Poeschel Verlag fr Wirtschaft Steuern Recht GmbH www.sp-dozenten.de Institut fr Wirtschaftswissenschaft. Universitt Erlangen-Nrnberg. 6 Indicators of Short-Run Fluctuations: German GDP Real GDP Growth rate of GDP Growth rate of GDP in % Growth rate of GDP Year Real GDP (bill. Euro) Slide 7 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik7 2008 Schffer-Poeschel Verlag fr Wirtschaft Steuern Recht GmbH www.sp-dozenten.de Institut fr Wirtschaftswissenschaft. Universitt Erlangen-Nrnberg. 7 Indicators of Short-Run Fluctuations: Investments Investments Growth rate of investments Growth rate of Investments in % Year Real investments (bill. Euro) Slide 8 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik8 Indicators of Short-Run Fluctuations: Unemployment Rate Year Unemployment rate in % Slide 9 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik9 Explaining Short-Run Economic Fluctuations How the Short Run Differs from the Long Run Most economists believe that classical theory describes the world in the long run but not in the short run. Changes in the money supply affect nominal variables but not real variables in the long run. The assumption of monetary neutrality is not appropriate when studying year-to-year changes in the economy. Slide 10 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik10 The Basic Model of Economic Fluctuations Two variables are used to develop a model to analyze the short-run fluctuations. The economys output of goods and services measured by real GDP. The overall price level measured by the CPI or the GDP deflator. Slide 11 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik11 The Basic Model of Economic Fluctuations The basic model of fluctuations is based on changes in supply and demand: the aggregated supply The aggregated demand Economist use the model of aggregate demand and aggregate supply to explain short-run fluctuations in economic activity around its long-run trend. Slide 12 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik12 The Basic Model of Economic Fluctuations The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level. The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level. Slide 13 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik13 Quantity of Output Price Level 0 Aggregate supply Aggregate demand Equilibrium output Equilibrium price level Aggregate Demand and Aggregate Supply... Slide 14 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik14 The Aggregate Demand Curve The four components of GDP (Y) contribute to the aggregate demand for goods and services. Y = C + I + G + NX with: C = Household Consumption I = Private Investments G= Government consumption NX = Net exports Slide 15 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik15 Quantity of Output Price Level 0 Aggregate demand P Y Y2Y2 P2P2 1. A decrease in the price level... 2.... increases the quantity of goods and services demanded. The Aggregate-Demand Curve... Slide 16 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik16 Why the Aggregate-Demand Curve Is Downward Sloping The Price Level and Consumption: The Wealth Effect The Price Level and Investment: The Interest Rate Effect The Price Level and Net Exports: The Exchange-Rate Effect Slide 17 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik17 Why the Aggregate-Demand Curve Is Downward Sloping The Price Level and Consumption: The Wealth Effect A decrease in the price level makes consumers feel more wealthy (the real value of, for instance, cash holdings increases), which in turn encourages them to spend more. This increase in consumer spending means larger quantities of goods and services demanded. Slide 18 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik18 Why the Aggregate-Demand Curve Is Downward Sloping The Price Level and Investment: The Interest Rate Effect A lower price level reduces the interest rate, which encourages greater spending on investment goods. This increase in investment spending means a larger quantity of goods and services demanded. Why does the interest rate decrease? With a lower price level, less money is being held for transactions, i.e. the demand for money decreases. Slide 19 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik19 Why the Aggregate-Demand Curve Is Downward Sloping The Price Level and Net Exports: The Exchange- Rate Effect A fall in the Euro price level causes Euro interest rates to fall. Lower interests rates relative to other currencies lead to lower capital inflows and larger capital outflows The Euro depreciates, which stimulates Euro net exports. The increase in net export spending means a larger quantity of goods and services demanded. Slide 20 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik20 Why the Aggregate-Demand Curve Might Shift The downward slope of the aggregate demand curve shows that a fall in the price level raises the overall quantity of goods and services demanded. Many other factors, however, affect the quantity of goods and services demanded at any given price level. Shifts arising from Consumption- Investment Government Purchases - Net Exports Slide 21 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik21 Shifts in the Aggregate Demand Curve Quantity of Output Price Level 0 Aggregate demand, D 1 P1P1 Y1Y1 D2D2 Y2Y2 Slide 22 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik22 The Aggregate-Supply Curve In the long run, the aggregate-supply curve is vertical. In the short run, the aggregate-supply curve is upward sloping. Slide 23 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik23 The Aggregate-Supply Curve The Long-Run Aggregate-Supply Curve In the long run, an economys production of goods and services depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services. The price level does not affect these variables in the long run. Slide 24 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik24 Quantity of Output Natural rate of output Price Level 0 Long-run aggregate supply P2P2 1. A change in the price level... 2.... does not affect the quantity of goods and services supplied in the long run. P The Long-Run Aggregate-Supply Curve Slide 25 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik25 The Aggregate-Supply Curve The Long-Run Aggregate-Supply Curve The long-run aggregate-supply curve is vertical at the natural rate of output. This level of production is also referred to as potential output or full-employment output. Slide 26 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik26 Why the Long-Run Aggregate- Supply Curve Might Shift Any change in the economy that alters the natural rate of output shifts the long-run aggregate- supply curve. The shifts may be categorized according to the various factors in the classical model that affect output Labor- Capital Natural Resources- Technological Knowledge Slide 27 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik27 Quantity of Output Y 1980 AD 1980 AD 1990 Aggregate Demand,AD 2000 Price Level 0 LRAS 1980 Y 1990 LRAS 1990 Y 2000 LRAS 2000 P 1980 1. In the long run, technological progress shifts long-run aggregate supply... 4.... and ongoing inflation. 3.... leading to growth in output... P 1990 P 2000 2.... and growth in the money supply shifts aggregate demand... Long-Run Growth and Inflation Slide 28 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik28 A New Way to Depict Long-Run Growth and Inflation Short-run fluctuations in output and price level should be viewed as deviations from the continuing long-run trends. In the short run, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied. A decrease in the level of prices tends to reduce the quantity of goods and services supplied. Slide 29 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik29 Quantity of Output Price Level 0 Short-run aggregate supply 1. A decrease in the price level... 2.... reduces the quantity of goods and services supplied in the short run. Y P Y2Y2 P2P2 The Short-Run Aggregate-Supply Curve Slide 30 Winter Semester 2011Alexander Fink, Institut fr Wirtschaftspolitik30 Why the Aggregate-Supply Curve S