Short-Run Economic Fluctuations
ECO/372
Introduction
The key ideas to better understand short-run economic fluctuations are as follows:Three key factors about short-run economic fluctuationsHow short-run economy differs from long-run economyEconomic fluctuationsModel of aggregate supply and aggregate demandMonetary policy and its effectsFiscal policy and its effectsWhy policymakers face short-run trade off between inflation and unemploymentWhy inflation-unemployment trade off disappears in long run
Three key factors about short run economic fluctuations
Macroeconomics quantities fluctuate together in many casesUnpredictableOutput changes unemployment numbers
How short run economy differs from long run economy
Short run deals with one factor of production for less than six monthsLong run deals with all factors of production from a specific firm for six months to a yearRecession and depression
Booms and Recession Causes
Aggregate Supply causes change with:CapitalLaborTechnological KnowledgeNatural Resources
Aggregate Demand Supply causes change with:GovernmentConsumptionInvestmentsNet exports
Economic Fluctuations
Consumers are wealthierInterest rates fallCurrency depreciation
Model of aggregate supply and aggregate demand
Mankiw, G. N. (2015). Principles of Macroeconomics (7th ed.). Retrieved from The University of Phoenix eBook Collection database. Figure 2: Aggregate Demand and Aggregate Supply
Monetary policy affects on interest rates and aggregate demand
Monetary policy impacts the money supplyInterest rates can be increased or decreased from the money supply being manipulatedLower interest rates increase aggregate demandHigher interest rates decrease aggregate demand
Fiscal policy affects interest rates and aggregate demand
Fiscal policy is how the government adjusts spending levels and tax ratesAggregate demand curve shifts indirectly when policymakers change the money supply or tax levelAggregate demand curve shifts directly when government alters its own purchases of goods and servicesTax cuts cause the aggregate demand curve to shift to the rightTax increases cause the aggregate demand curve to shift to the left
Fiscal Policy – Crowding out Effect
Mankiw, G. N. (2015). Principles of Macroeconomics (7th ed.). Retrieved from The University of Phoenix eBook Collection database. Figure 5: The Crowding-Out Effect
Short-Run: Inflation and Unemployment
Phillips CurveLow Demand: Low Inflation/High UnemploymentHigh Demand: High Inflation/Low Unemployment
Short Run: Shift
Mankiw, G. N. (2015). Principles of Macroeconomics (7th ed.). Retrieved from The University of Phoenix eBook Collection database. Figure 5: How Expected Inflation Shifts the Short-Run Phillips Curve
Long-Run: Inflation and Unemployment
Phillips Curve (Long-Run)Long-Run Aggregated Supply Curve (LRAS curve)Inflation FactorsUnemployment Factors
Long Run: Phillips Curve
Mankiw, G. N. (2015). Principles of Macroeconomics (7th ed.). Retrieved from The University of Phoenix eBook Collection database. Figure 4: How The Long Run Phillips Curve is Related to the Model of Aggregate Demand and Aggregate Supply
Conclusion
In conclusion, we completed an overview of short-run economic fluctuations with the following information:The three key factors about short-run economic fluctuationsHow the short-run economy and long-run economy differExplained booms and recessions, along with fluctuationsReviewed how monetary policy affects interest rates and aggregate demandHow fiscal policy affects interest rates and aggregate demandWhy policymakers face short-run trade-off between inflation and unemploymentWhy inflation-unemployment trade-off disappears in the long run
References
Mankiw, N. G. (2015). Principles of Macroeconomics (7th ed.). Retrieved from The University of Phoenix eBook Collection database.Hall, M. (2018). Investopedia. Retrieved from https://www.investopedia.com/ask/answers/040315/how-do-fiscal-and-monetary-policies-affect-aggregate-demand.asp