Learning Team A: Week 4 FINAL: Short-Run Economic Fluctuations

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