07 - Short Run Fluctuations Flashcards
What are the Three Key Features of Economic Fluctuations (resulting in recessions and booms)?
- co movement
- limited predicatbility
- persistence
What are the three reasons for why economic fluctuations occur?
- productivity shocks
- changing expectations
- monetary factors
Economic shocks are amplified (verstärkt) by…
1.
2.
- downward rigidity
- multipliers
What are economic fluctuations and business cycles?
- short run changes in the growth of GDP
What is a recession?
What is a boom?
How long do they last and when do they take place?
- contraction; defined as an episode of negative economic growth (lasting at least two quarters)
- expansion; defined as a period of positive growth (expansions are periods between recessions)
What are the most drastic examples for recessions and their causes?
1.
2.
3.
- great depression (reason: stock market crash)
- post war recession (reason: strong reduction in government spending)
- financial crisis (reason: burst of housing bubble)
- corona crisis
What are the key properties of economic fluctuations?
1.
2.
3.
- co movement of many macroeconomic variables
- limited predictability of turning points (i.e. not knowing when a recessions starts and how long it lasts)
- persistence in the rate of economic growth (i.e. best bet growth rate next quarter is growth rate from the current one)
The origin of recessions can be modeled as shocks…..
A leftwards shift in the labor demand curve leads to….
….. to labor demand
…. a decrease in employment and real GDP
A leftwards shift of the labor demand curve can result from….
1.
2.
3.
4.
OLDI
…. fall in output prices
- decrease in output demand
- decrease in labor productivtiy/ technology
- rise in input prices
What are the theories and models explaning fluctuations?
1.
2.
3.
CKM
- real business cycle theory; emphazises changes in productivity and input prices
- keynesian theory; focuses on business and consumer expectations of the future
- monetary theory; looks at changes in monetary policy
(all: can be illustrated usinf shifts of labor demand curve)
What is the Real Business Cycle in Short?
1.
2.
3.
- innovation = key root of short run expansions. bc tech is key driver of GDP growth in long run
- stresses relevance of input prices, e.g. strong increase in oil prices may cause recession
- e.g. tech increases marginal product of labor -> employment goes up -> consumption and demand goes up; GDP goes up
What is the Keynesian Theory in Short?
1.
2.
3.
- focuses on changing expectiations of future such as animal spirits changing people mood (even if actual facts have not changed)
- might be self enforcing and lead to “too low” aggragate demand and a recession (which needs policy stimulus to get out again)
- e.g. firm expects weakening demand and use less inputs, employemnt goes down, consumption / demand goes down, GDP goes down
What is the Monetary Theory in short?
1.
2.
3.
- changes in money supply can affect prices and interest rates with having real impact in the economy
- proponents of this theory argue that monetary policy should exclusively be targeted at price stability
- e.g. money supply drops, inflation and prices go down, labor demand goes down (bc wages are downward rigid), GDP goes down
What are the two fundamental resources that can reverse the effects of a recession in the medium run (2-3 years)?
- market forces
- countercyclical policies
What are examples of market forces? + Explanations
1.
2.
3.
4.
5.
RSPTI
All these market forces will shift labor demand to….
- firms rebuildimng inventory (when all inventory has been sold off)
- households starting spending again (after being careful for a while)
- facotrs of production flourishing in surviving more productive companies (after some unproductive companies went bankrupt)
- technological progress (encouraging firms to expand their activities again)
- financial intermediation recovering (with banks trusting again to give credit)
…. the right again
