Income and Spending Chapter #10 (DFS) Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. * IntroductionWhy output fluctuates around its potential level?In business cycle booms and recessions, output rises and falls relative to the trend of potential outputModel in this chapter assumes a mutual interaction between output and spending: spending determines output and income, but output and income also determine spendingThe Keynesian model develops the theory of ADAssume that prices do not change at all and that firms are willing to sell any amount of output at the given level of prices  AS curve is flatKey finding: increases in autonomous spending generate additional increases in AD 10-* * AD and Equilibrium OutputAD is the total amount of goods demanded in the economy: (1)Output is at its equilibrium level when the quantity of output produced is equal to the quantity demanded, or (2)When AD is not equal to output there is unplanned inventory investment or disinvestment: (3), where IU is unplanned additions to inventoryIf IU > 0, firms cut back on production until output and AD are again in equilibrium 10-* * The Consumption FunctionConsumption is the largest component of ADConsumption increases with income  the relationship between consumption and income is described by the consumption functionIf C is consumption and Y is income, the consumption function is (4), where and The intercept of equation (4) is the level of consumption when income is zero  this is greater than zero since there is a subsistence level of consumptionThe slope of equation (4) is known as the marginal propensity to consume (MPC)  the increase in consumption per unit increase in income 10-* * The Consumption Function 10-* * Consumption and SavingsIncome is either spent or saved  a theory that explains consumption is equivalently explaining the behavior of savingMore formally, (5)  a budget constraint Combining (4) and (5) yields the savings function: (6)Saving is an increasing function of the level of income because the marginal propensity to save (MPS), s = 1-c, is positiveSavings increases as income risesEx. If MPS is 0.1, for every extra dollar of income, savings increases by $0.10 OR consumers save 10% of an extra dollar of income 10-* * Consumption, AD, and Autonomous Spending Now we incorporate the other components of AD: G, I, taxes, and foreign trade (assume autonomous)Consumption now depends on disposable income, (7) and (8) AD then becomes .

1. Income and Spending
Chapter #10 (DFS)
Copyright © 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
*
IntroductionWhy output fluctuates around its potential level?In
business cycle booms and recessions, output rises and falls
relative to the trend of potential outputModel in this chapter
assumes a mutual interaction between output and spending:
spending determines output and income, but output and income
also determine spendingThe Keynesian model develops the
theory of ADAssume that prices do not change at all and that
firms are willing to sell any amount of output at the given level
autonomous spending generate additional increases in AD
10-*
*

2. AD and Equilibrium OutputAD is the total amount of goods
demanded in the economy: (1)Output is
at its equilibrium level when the quantity of output produced is
equal to the quantity demanded, or
(2)When AD is not equal to output there is unplanned inventory
investment or disinvestment: (3), where IU is
unplanned additions to inventoryIf IU > 0, firms cut back on
production until output and AD are again in equilibrium
10-*
*
The Consumption FunctionConsumption is the largest
relationship between consumption and income is described by
the consumption functionIf C is consumption and Y is income,
the consumption function is (4), where and
The intercept of equation (4) is the level of consumption when
e is a
subsistence level of consumptionThe slope of equation (4) is
increase in consumption per unit increase in income
10-*
*

3. The Consumption Function
10-*
*
Consumption and SavingsIn
theory that explains consumption is equivalently explaining the
constraint Combining (4) and (5) yields the savings function:
(6)Saving is an increasing function of the level of income
because the marginal propensity to save (MPS), s = 1-c, is
positiveSavings increases as income risesEx. If MPS is 0.1, for
every extra dollar of income, savings increases by $0.10 OR
consumers save 10% of an extra dollar of income
10-*
*
Consumption, AD, and

4. Autonomous Spending
Now we incorporate the other components of AD: G, I, taxes,
and foreign trade (assume autonomous)Consumption now
depends on disposable income,
(7) and
(8) AD then becomes
(9)
where A is independent of the level of income, or autonomous
10-*
*
Consumption, AD, and
Autonomous Spending
10-*
*
Equilibrium Income and Output

5. 10-*Equilibrium occurs where Y=AD, which is illustrated by
how how the economy
reaches equilibriumAt any level of output below Y0, firms’
inventories decline, and they increase productionAt any level of
output above Y0, firms’ inventories increase, and they decrease
production
*
The Formula for Equilibrium OutputCan solve for the
equilibrium level of output, Y0, algebraically:The equilibrium
condition is Y = AD (10)Substituting (9) into (10) yields
(11) Solve for Y to find the equilibrium level of output:
(12)
The equilibrium level of output is higher the larger the
MPC and the higher the level of autonomous spending.
10-*
*
The Formula for Equilibrium OutputEquation (12) shows the

6. level of output as a function of the MPC and AFrequently we
are interested in knowing how a change in some component of
autonomous spending would change output Relate changes in
output to changes in autonomous spending through
(13)
Ex. If the MPC = 0.9, then 1/(1-c) = 1
government spending by $1 billion results in an increase in
output by $10 billionRecipients of increased government
spending increase their own spending, the recipients of that
spending increase their spending and so on
10-*
*
Saving and Investment
10-*In equilibrium, planned investment equals saving in an
economy with no government or tradeVertical distance between
the AD and consumption schedules equal to planned investment
spending, IThe vertical distance between the consumption
schedule and the 45° line measures saving at each level of
income
*
Saving and InvestmentThe equality between planned investment

7. and saving can be seen directly from national income
accountingIncome is either spent or saved:Without G or
trade,Putting the two together:
10-*
*
Saving and InvestmentWith government and foreign trade in the
model:Income is either spent, saved, or paid in taxes:Complete
aggregate demand isPutting the two together:
(14)
10-*
*
The MultiplierBy how much does a $1 increase in autonomous
not $1Out of an additional dollar in income, $c is
consumedOutput increases to meet increased expenditure;
change in output = (1+c)Expansion in output and income results
in further increases

8. 10-*
*
The MultiplierIf we write out the successive rounds of increased
spending, starting with the initial increase in autonomous
demand, we have:
(15)
This is a geometric series, where c < 1, that simplifies to:
(16)
Multiplier = amount by which equilibrium output changes when
autonomous aggregate demand increases by 1 unitThe general
definition of the multiplier is
(17)
10-*
*
The Multiplier
10-*Effect of an increase in autonomous spending on the
equilibrium level of output:The initial equilibrium is at point E,
with income at Y0If autonomous spending increases, the AD
curve shifts up by , and income increases to Y’The new
equilibrium is at E’ with income at

9. *
The Government SectorThe government affects the level of
equilibrium output in two ways:
Government expenditures (component of AD)
Taxes and transfersFiscal policy is the policy of the government
with regards to G, TR, and TAAssume G and TR are constant,
and that there is a proportional income tax (t)The consumption
function becomes: (19)
10-*
*
The Government SectorCombining (19) with AD:
(20)
Using the equilibrium condition, Y=AD, and equation (19), the
equilibrium level of output is:
(21)
The presence of the government sector flattens the AD curve
and reduces the multiplier to
10-*

10. *
Income Taxes as an Automatic StabilizerAutomatic stabilizer is
any mechanism in the economy that automatically (without
case-by-case government intervention) reduces the amount by
which output changes in response to a change in autonomous
demandOne explanation of the business cycle is that it is caused
by shifts in autonomous demand, especially investmentSwings
in investment demand have a smaller effect on output when
automatic stabilizers are in place (ex. Proportional income
tax)Unemployment benefits are another example of an automatic
though they do not have a job
10-*
*
Effects of a Change in Fiscal Policy
10-*Suppose government expenditures increaseResults in a
change in autonomous spending and shifts the AD schedule
upward by the amount of that changeAt the initial level of
output, Y0, the demand for goods > output, and firms increase
production until reach new equilibrium (E’)How much does
income expand? The change in equilibrium income is:

11. (22)
*
Effects of a Change in Fiscal Policy
10-*
(22)
A $1 increase in G will lead to an increase in income in excess
of a dollarIf c = 0.80 and t = 0.25, the multiplier is 2.5
A $1 increase in G results in an increase in equilibrium income
n in Figure 10-3
*
Effects of a Change in Fiscal PolicySuppose government
increases TR insteadAutonomous spending would increase by
multiplier for transfer payments is smaller than that for G by a
factor of cPart of any increase in TR is saved (since considered
income) If the government increases marginal tax rates, two
things happen:The direct effect is that AD is reduced since
disposable income decreases, and thus consumption fallsThe
multiplier is smaller, and the shock will have a smaller effect on
AD

12. 10-*
*
The BudgetGovernment budget deficits have been the norm in
the U.S. since the 1960sIs there a reason for concern over a
budget deficit?The fear is that the government’s borrowing
economic growth
10-*
*
The BudgetThe budget surplus is the excess of the government’s
revenues, TA, over its initial expenditures consisting of
purchases of goods and services and TR: (24)
A negative budget surplus is a budget deficit
10-*
*
The Budget

13. 10-*If TA = tY, the budget surplus is defined as:
(24a)Figure 10-6 plots the BS as a function of the level of
income for given G, TR, and tAt low levels of income, the
budget is in deficit since spends more than it receives in
incomeAt high levels of income, the budget is in surplus since
the government receives more in income than it spends
*
The BudgetFigure 10-6 shows that the budget deficit depends on
the government’s policy choices (G, t, and TR) and also
anything else that shifts the level of incomeEx. Suppose that
there is an increase in I demand that increases the level of
output
10-*
*
Effects of Government Purchases
and Tax Changes on the BS
How do changes in fiscal policy affect the budget? OR Must an
increase in G reduce the BS? An increase in G reduces the
surplus, but also increases income, and thus tax revenues
Possibility that increased tax collections > increase in G

14. 10-*
*
Effects of Government Purchases
and Tax Changes on the BS
The change in income due to increased G is equal to
, a fraction of which is collected in taxes
Tax revenues increases by
The change in BS is
(25)
10-*
*
NX
G
I
C
AD
+

15. +
+
=
NX
G
I
C
AD
Y
+
+
+
=
=
AD
Y
IU
-
=
cY
C
C
+
=
0
>
C
1
0
<
<
c
C
Y
S
-

16. º
Y
c
C
cY
C
Y
C
Y
S
)
1
(
-
+
-
=
-
-
=
-
º
TR
TA
Y
YD
+
-
=
)
(
TA
TR
Y
c
C

17. cYD
C
C
-
+
+
=
+
=
[
]
cY
A
cY
NX
G
I
TR
TA
c
C
NX
G
I
TR
TA
Y
c
C
NX
G
I
C
AD
+
=

18. +
+
+
+
-
-
=
+
+
+
+
-
+
=
+
+
+
=
)
(
)
(
cY
A
Y
+
=
A
c
Y
A
c
Y
A
cY
Y

19. )
1
(
1
)
1
(
0
-
=
=
-
=
-
A
c
Y
D
-
=
D
)
1
(
1
S
C
Y
+
=
I
C
Y
+
=
I

20. S
I
C
S
C
=
+
=
+
TR
TA
S
C
Y
-
+
+
=
NX
G
I
C
AD
+
+
+
=
NX
G
TR
TA
S
I
TR
TA
S

21. C
NX
G
I
C
-
-
-
+
=
-
+
+
=
+
+
+
)
(
...)
1
(
...
3
2
3
2
+
+
+
+
D
=
+
D
+

22. D
+
D
+
D
=
D
c
c
c
A
A
c
A
c
A
c
A
AD
0
)
1
(
1
Y
A
c
AD
D
=
D
-
=
D
)
1

23. (
1
c
A
Y
-
=
=
D
D
a
0
0
0
Y
Y
Y
-
¢
=
D
A
D
Y
t
c
cTR
C
tY
TR
Y
c
C
C
)
1

24. (
)
(
-
+
+
=
-
+
+
=
[
]
Y
t
c
A
NX
G
I
Y
t
c
cTR
C
NX
G
I
C
AD
)
1
(
)
1
(

25. -
+
=
+
+
+
-
+
+
=
+
+
+
=
[
]
)
1
(
1
)
1
(
1
)
1
(
)
1
(
0
t
c
A
Y
A

26. t
c
Y
A
Y
t
c
Y
Y
t
c
A
Y
-
-
=
=
-
-
=
-
-
-
+
=
))
1
(
1
(
1
t
c
-
-
G

27. G
t
c
Y
G
D
=
D
-
-
=
D
a
)
1
(
1
1
0
TR
G
TA
BS
-
-
º
TR
G
tY
BS
-
-
º
G
Y
G

28. D
º
D
a
0
G
t
G
D
a
G
t
c
t
c
G
G
t
G
TA
BS
G
D
-
-
-
-
-
=
D
-
D
=
D
-
D

29. =
D
)
1
(
1
)
1
)(
1
(
a
Assignment 2: Job Analysis / Job Description
Due Week 4 and worth 100 points
Go to YouTube, located at http://www.youtube.com/, and search
for an episode of “UnderCover Boss”. Imagine you are the CEO
of the company in the selected episode.
Write a two to three (2-3) page paper in which you:
1. Compare two (2) job positions from the episode and perform
a job analysis of each position.
2. Describe your method of collecting the information for the
job analysis (i.e., one-on-one, interview, survey, etc.).
3. Create a job description from the job analysis.
4. Justify your belief that the job analysis and job description
are in compliance with state and federal regulations.
5. Use at least three (3) quality academic resources in this
assignment. Note: Wikipedia and other Websites do not qualify
as academic resources.
Your assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size
12), with one-inch margins on all sides; citations and references
must follow APA or school-specific format. Check with your

30. professor for any additional instructions.
· Include a cover page containing the title of the assignment, the
student’s name, the professor’s name, the course title, and the
date. The cover page and the reference page are not included in
the required assignment page length.
The specific course learning outcomes associated with this
assignment are:
· Formulate HRM strategies and policies to recruit, select,
place, and retain the most efficient and effective workforce.
· Develop effective talent management strategies to recruit and
select employees.
· Design processes to manage employee performance, retention,
and separation.
· Use technology and information resources to research issues in
strategic human resource development.
· Write clearly and concisely about strategic human resource
development using proper writing mechanics.
Grading for this assignment will be based on answer quality,
logic / organization of the paper, and language and writing
skills, using the following rubric.
Points: 100
Assignment 2: Job Analysis / Job Description
Criteria
Unacceptable
Below 70% F
Fair
70-79% C
Proficient
80-89% B
Exemplary
90-100% A
1. Compare two (2) job positions from the episode and perform
a job analysis of each position.
Weight: 20%

31. Did not submit or incompletely compared two (2) job positions
from the episode and did not submit or incompletely performed
a job analysis of each position.
Partially compared two (2) job positions from the episode and
partially performed a job analysis of each position.
Satisfactorily compared two (2) job positions from the episode
and satisfactorily performed a job analysis of each position.
Thoroughly compared two (2) job positions from the episode
and thoroughly performed a job analysis of each position.
2. Describe your method of collecting the information for the
job analysis (i.e., one-on-one, interview, survey, etc.).
Weight: 20%
Did not submit or incompletely described your method of
collecting the information for the job analysis (i.e., one-on-one,
interview, survey, etc.).
Partially described your method of collecting the information
for the job analysis (i.e., one-on-one, interview, survey, etc.).
Satisfactorily described your method of collecting the
information for the job analysis (i.e., one-on-one, interview,
survey, etc.).
Thoroughly described your method of collecting the information
for the job analysis (i.e., one-on-one, interview, survey, etc.).
3. Create a job description from the job analysis.
Weight: 20%
Did not submit or incompletely created a job description from
the job analysis.
Partially created a job description from the job analysis.
Satisfactorily created a job description from the job analysis.
Thoroughly created a job description from the job analysis.
4. Justify your belief that the job analysis and job description
are in compliance with state and federal regulations.
Weight: 25%
Did not submit or incompletely justified your belief that the job
analysis and job description are in compliance with state and
federal regulations.
Partially justified your belief that the job analysis and job

32. description are in compliance with state and federal regulations.
Satisfactorily justified your belief that the job analysis and job
description are in compliance with state and federal regulations.
Thoroughly justified your belief that the job analysis and job
description are in compliance with state and federal regulations.
5. 3 references
Weight: 5%
No references provided
Does not meet the required number of references; some or all
references poor quality choices.
Meets number of required references; all references high quality
choices.
Exceeds number of required references; all references high
quality choices.
6. Clarity, writing mechanics, and formatting requirements
Weight: 10%
More than 6 errors present
5-6 errors present
3-4 errors present
0-2 errors present
Introduction to Economic Fluctuations
Reading: Chapter 10, Mankiw.
Extra optional reading: Chapter 9, Jones.
Tasneem Raihan
Department of Economics
University of California, Riverside
MACROECONOMICS
© 2015 Worth Publishers, all rights reserved
N. Gregory Mankiw

33. PowerPoint ® Slides by Ron Cronovich
Fall 2014 update
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
IN THIS CHAPTER, YOU WILL LEARN:
facts about the business cycle
how the short run differs from the long run
an introduction to aggregate demand
an introduction to aggregate supply in the short run and long
run
how the model of aggregate demand and aggregate supply can
be used to analyze the short-run and long-run effects of
“shocks.”
1
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
1
Facts about the business cycle
GDP growth averages 3–3.5 percent per year over the long run
with large fluctuations in the short run.
Consumption and investment fluctuate with GDP, but
consumption tends to be less volatile and investment more
volatile than GDP.
Unemployment rises during recessions and falls during
expansions.
Okun’s law: the negative relationship between GDP and
unemployment.
‹#›

34. CHAPTER 10 Introduction to Economic Fluctuations
2
The four slides that follow provide data on each of these points.
Growth rates of real GDP, consumption
Percent change from 4 quarters earlier
Average growth rate
Real GDP
growth rate
Consumption growth rate
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
The shaded vertical bars denote recessions.
Over the long run, real GDP grows about 3 percent per year.
Over the short run, though, there are substantial fluctuations in
GDP, as this graph clearly shows.
This graph also shows the growth rate of consumption. It’s
easy to see that consumption is usually less volatile than
income. Consumers prefer smooth consumption, so they use
saving as a buffer against income shocks.
(An exception occurs in the late 1990s, when consumption
growth exceeded income growth – probably due to the stock
market boom.)

35. Source of data: FRED
3
Recession 1970.0 1970.25 1970.5 1970.75 1971.0
1971.25 1971.5 1971.75 1972.0 1972.25 1972.5
1972.75 1973.0 1973.25 1973.5 1973.75 1974.0
1974.25 1974.5 1974.75 1975.0 1975.25 1975.5
1975.75 1976.0 1976.25 1976.5 1976.75 1977.0
1977.25 1977.5 1977.75 1978.0 1978.25 1978.5
1978.75 1979.0 1979.25 1979.5 1979.75 1980.0
1980.25 1980.5 1980.75 1981.0 1981.25 1981.5
1981.75 1982.0 1982.25 1982.5 1982.75 1983.0
1983.25 1983.5 1983.75 1984.0 1984.25 1984.5
1984.75 1985.0 1985.25 1985.5 1985.75 1986.0
1986.25 1986.5 1986.75 1987.0 19 87.25
1987.5 1987.75 1988.0 1988.25 1988.5
1988.75 1989.0 1989.25 1989.5 1989.75 1990.0
1990.25 1990.5 1990.75 1991.0 1991.25 1991.5
1991.75 1992.0 1992.25 1992.5 1992.75 1993.0
1993.25 1993.5 1993.75 1994.0 1994.25 1994.5
1994.75 1995.0 1995.25 1995.5 1995.75 1996.0
1996.25 1996.5 1996.75 1997.0 1997.25 1997.5
1997.75 1998.0 1998.25 1998.5 1998.75 1999.0
1999.25 1999.5 1999.75 2000.0 2000.25 2000.5
2000.75 2001.0 2001.25 2001.5 2001.75 2002.0
2002.25 2002.5 2002.75 2003.0 2003.25 2003.5
2003.75 2004.0 2004.25 2004.5 2004.75 2005.0
2005.25 2005.5 2005.75 2006.0 2006.25 2006.5
2006.75 2007.0 2007.25 2007.5 2007.75 2008.0
2008.25 2008.5 2008.75 2009.0 2009.25 2009.5
2009.75 2010.0 2010.25 2010.5 2010.75 2011.0
2011.25 2011.5 2011.75 2012.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0

36. 100.0 100.0 100.0 100.0 100.0 100.0
1970.0 1970.25 1970.5 1970.75 1971.0
1971.25 1971.5 1971.75 1972.0 1972.25 1972.5
1972.75 1973.0 1973.25 1973.5 1973.75 1974.0
1974.25 1974.5 1974.75 1975.0 1975.25 1975.5
1975.75 1976.0 1976.25 1976.5 1976.75 1977.0
1977.25 1977.5 1977.75 1978.0 1978.25 1978.5
1978.75 1979.0 1979.25 1979.5 1979.75 1980.0
1980.25 1980.5 1980.75 1981.0 1981.25 1981.5
1981.75 1982.0 1982.25 1982.5 1982.75 1983.0
1983.25 1983.5 1983.75 1984.0 1984.25 1984.5
1984.75 1985.0 1985.25 1985.5 1985.75 1986.0
1986.25 1986.5 1986.75 1987.0 1987.25 1987.5
1987.75 1988.0 1988.25 1988.5 1988.75 1989.0
1989.25 1989.5 1989.75 1990.0 1990.25 1990.5
1990.75 1991.0 1991.25 1991.5 1991.75 1992.0
1992.25 1992.5 1992.75 1993.0 1993.25 1993.5
1993.75 1994.0 1994.25 1994.5 1994.75 1995.0
1995.25 1995.5 1995.75 1996.0 1996.25 1996.5
1996.75 1997.0 1997.25 1997.5 1997.75 1998.0
1998.25 1998.5 1998.75 1999.0 1999.25 1999.5
1999.75 2000.0 2000.25 2000.5 2000.75 2001.0
2001.25 2001.5 2001.75 2002.0 2002.25 2002.5
2002.75 2003.0 2003.25 2003.5 2003.75 2004.0
2004.25 2004.5 2004.75 2005.0 2005.25 2005.5
2005.75 2006.0 2006.25 2006.5 2006.75 2007.0
2007.25 2007.5 2007.75 2008.0 2008.25 2008.5
2008.75 200 9.0 2009.25 2009.5 2009.75 2010.0
2010.25 2010.5 2010.75 2011.0 2011.25 2011.5
2011.75 2012.0 2012.25 2012.5 2012.75 2013.0
2013.25 2013.5 2013.75 2014.0 0.33496 0.1914
0.45017 -0.15071 2.70265 3.10543 2.99823
4.37084 3.4597 5.2559 5.40314 6.84387
7.558539999999995 6.31565 4.77344
4.022499999999996 0.67911 -0.18765 -0.61597 -
1.92614 -2.30078 -1.80632 0.79474 2.561949999999999

37. 6.160739999999995 6.145589999999995 4.9506
4.33087 3.216089999999999 4.45285
5.762189999999995 4.98585 4.137819999999995
6.105039999999995 5.28023 6.680309999999999
6.522889999999995 2.659879999999997
2.395509999999998 1.30198 1.42855 -0.74916 -
1.60646 -0.04156 1.6984 3.045869999999999 4.38676
1.29194 -2.422829999999998 -1.16866 -2.64285 -
1.39556 1.594 3.34907 5.754809999999995
7.828929999999995 8.549560000000001 7.99125 6.9593
5.634829999999995 4.606819999999995 3.74335
4.33039 4.28121 4.21229 3.73976 3.17902
2.94118 2.7084 3.38731 3.2864 4.44837
4.307319999999995 4.512079999999997 4.16963
3.836399999999998 4.297509999999995 3.74622
3.92145 2.77972 2.86704 2.45983 1.72521
0.64588 -0.91077 -0.52608 -0.07354 1.22502
2.90308 3.235889999999999 3.74232
4.326729999999999 3.30071 2.78064 2.28736
2.62438 3.43743 4.23236 4.337909999999995
4.132489999999995 3.474159999999999 2.43549
2.70725 2.27553 2.595299999999999 4.0233
4.094059999999995 4.45273 4.56304 4.3193
4.680079999999997 4.38876 4.624809999999993
4.06938 4.104569999999995 4.99812 4.9412
4.807899999999996 4.77174 4.863959999999995
4.19117 5.27253 4.08165 2.856489999999995
2.26846 0.90565 0.47008 0.18294 1.41471
1.43084 2.22974 2.0283 1.59069 1.99384
3.22073 4.34162 4.43639 4.24961
3.417079999999999 3.11999 3.62765 3.40245
3.339599999999999 3.042079999999999 3.16449 2.923
2.1794 2.410239999999999 1.24911 1.71263
2.308209999999998 1.88675 1.13592 0.86043 -
0.31054 -2.81073 -3.51317 -4.0904 -3.30713 -0.23603
1.56971 2.654469999999998 3.03281 2.76612

38. 2.02977 1.85439 1.50142 2.0057 3.2738
2.77391 3.13303 1.95183 1.31521 1.63343
1.96537 2.591439999999999 1.54198 Real Consump
Expend 1970.0 1970.25 1970.5 1970.75 1971.0
1971.25 1971.5 1971.75 1972.0 1972.25 1972.5
1972.75 1973.0 1973.25 1973.5 1973.75 1974.0
1974.25 1974.5 1974.75 1975.0 1975.25 1975.5
1975.75 1976.0 1976.25 1976.5 1976.75 1977.0
1977.25 1977.5 1977.75 1978.0 1978.25 1978.5
1978.75 1979.0 1979.25 1979.5 1979.75 1980.0
1980.25 1980.5 1980.75 1981.0 1981.25 1981.5
1981.75 1982.0 1982.25 1982.5 1982.75 1983.0
1983.25 1983.5 1983.75 1984.0 1984.25 1984.5
1984.75 1985.0 1985.25 1985.5 1985.75 1986.0
1986.25 1986.5 1986.75 1987.0 1987.25 1987.5
1987.75 1988.0 1988.25 1988.5 1988.75 1989.0
1989.25 1989.5 1989.75 1990.0 1990.2 5
1990.5 1990.75 1991.0 1991.25 1991.5
1991.75 1992.0 1992.25 1992.5 1992.75 1993.0
1993.25 1993.5 1993.75 1994.0 1994.25 1994.5
1994.75 1995.0 1995.25 1995.5 1995.75 1996.0
1996.25 1996.5 1996.75 1997.0 1997.25 1997.5
1997.75 1998.0 1998.25 1998.5 1998.75 1999.0
1999.25 1999.5 1999.75 2000.0 2000.25 2000.5
2000.75 2001.0 2001.25 2001.5 2001.75 2002.0
2002.25 2002.5 2002.75 2003.0 2003.25 2003.5
2003.75 2004.0 2004.25 2004.5 2004.75 2005.0
2005.25 2005.5 2005.75 2006.0 2006.25 2006.5
2006.75 2007.0 2007.25 2007.5 2007.75 2008.0
2008.25 2008.5 2008.75 2009.0 2009.25 2009.5
2009.75 2010.0 2010.25 2010.5 2010.75 2011.0
2011.25 2011.5 2011.75 2012.0 2012.25 2012.5
2012.75 2013.0 2013.25 2013.5 2013.75 2014.0
2.56556 2.38668 2.78325 1.69302 3.00097
3.47066 3.38913 5.3927 4.77955 5.80736
6.58919 7.30873 7.84364 5.77882 4.54475

39. 1.84539 -0.84953 -0.46222 -0.40708 -1.5795
0.11725 1.43503 2.45845 5.08706 6.29692
5.514209999999998 5.13381 5.38827 4.50578
4.123159999999995 4.01064 4.21873 3.63572
5.26641 4.7108 3.98237 3.907249999999999
1.67531 2.24816 1.70804 1.03923 -1.1755 -
1.08444 -0.03969 0.64098 2.93811 2.2505 0.15386
0.29129 0.68146 1.05253 3.67452 3.98996
5.660049999999995 6.68987 6.428949999999999
6.298519999999995 5.72125 4.696519999999995
4.43501 5.317419999999995 4.810099999999998
6.00871 4.893889999999995 4.017169999999997
4.20184 4.08977 4.48722 3.6242
3.899729999999999 3.23409 2.79369 4.60377
3.93136 3.616649999999995 4.58432 3.23288
2.96171 3.10464 2.38695 2.79196 2.63063
2.031899999999998 0.81453 -0.38878 0.13389
0.21581 0.95115 3.20395 3.0471 3.65916 4.9211
3.3778 3.59551 3.61613 3.306569999999998
4.09385 3.96842 3.63174 3.82602
2.921679999999998 3.045 3.18988 2.8089
3.489059999999998 3.68262 3.35955 3.44509
3.57539 2.92721 4.06147 4.47608
4.452519999999995 5.81766 5.40659
5.698879999999995 5.71274 5.48964
5.365909999999995 5.28694 5.78693 5.1394
4.92931 4.4073 3.20561 2.532519999999999
1.86304 2.455369999999998 2.417809999999998
2.68198 3.0646 1.99181 2.17192 2.77525
3.53527 3.86661 4.40876 3.88531 3.36869
3.66714 3.44316 3.88313 3.6756 3.00391
3.328549999999999 2.801909999999999 2.65688
3.26888 2.719409999999998 2.518879999999998
2.30541 1.46336 0.67087 0.52493 -0.66003 -
1.96834 -2.093669999999999 -2.69532 -1.31083 -
0.12454 0.72941 1.97725 2.03798 3.0931 3.0851

40. 2.63724 2.466289999999999 2.00708
2.215959999999999 2.31896 2.22171
2.040859999999999 1.87791 1.85866 1.92771 2.3307
2.0218
Growth rates of real GDP, consump., investment
Investment growth rate
Real GDP
growth rate
Consumption growth rate
Percent change from 4 quarters earlier
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
This graph shows consumption growth and GDP growth, the
same data from the previous slide, but now the vertical axis has
a much bigger scale to accommodate the addition of investment
growth.
The point: Investment is far more volatile than GDP or
consumption.
Source: FRED
4
Recession 1970.0 1970.25 1970.5 1970.75 1971.0
1971.25 1971.5 1971.75 1972.0 1972.25 1972.5
1972.75 1973.0 1973.25 1973.5 1973.75 1974.0
1974.25 1974.5 1974.75 1975.0 1975.25 1975.5

41. 1975.75 1976.0 1976.25 1976.5 1976.75 1977.0
1977.25 1977.5 1977.75 1978.0 1978.25 1978.5
1978.75 1979.0 1979.25 1979.5 1979.75 1980.0
1980.25 1980.5 1980.75 1981.0 1981.25 1981.5
1981.75 1982.0 1982.25 1982.5 1982.75 1983.0
1983.25 1983.5 1983.75 1984.0 1984.25 1984.5
1984.75 1985.0 1985.25 1985.5 1985.75 1986.0
1986.25 1986.5 1986.75 1987.0 1987.25 1987.5
1987.75 1988.0 1988.25 1988.5 1988.75 1989.0
1989.25 1989.5 1989.75 1990.0 1990.25 1990.5
1990.75 1991.0 1991.25 1991.5 1991.75 1992.0
1992.25 1992.5 1992.75 1993.0 1993.25 1993.5
1993.75 1994.0 1994.25 1994.5 1994.75 1995.0
1995.25 1995.5 1995.75 1996.0 1996.25 1996.5
1996.75 1997.0 1997.25 1997.5 1997.75 1998.0
1998.25 1998.5 1998.75 1999.0 1999.25 1999.5
1999.75 2000.0 2000.25 2000.5 2000.75 2001.0
2001.25 2001.5 2001.75 2002.0 2002.25 2002.5
2002.75 2003.0 2003.25 2003.5 2003.75 2004.0
2004.25 2004.5 2004.75 2005.0 2005.25 2005.5
2005.75 2006.0 2006.25 2006.5 2006.75 2007.0
2007.25 2007.5 2007.75 2008.0 2008.25 2008.5
2008.75 2009.0 2009.25 2009.5 2009.75 2010.0
2010.25 2010.5 2010.75 2011.0 2011.25 2011.5
2011.75 2012.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 Var GDP 1970.0
1970.25 1970.5 1970.75 1971.0 1971.25 1971.5
1971.75 1972.0 1972.25 1972.5 1972.75 1973.0
1973.25 1973.5 1973.75 1974.0 1974.25 1974.5
1974.75 1975.0 1975.25 1975.5 1975.75 1976.0
1976.25 1976.5 1976.75 1977.0 1977.25 1977.5
1977.75 1978.0 1978.25 1978.5 1978.75 1979.0

42. 1979.25 1979.5 1979.75 1980.0 1980.25 1980.5
1980.75 1981.0 1981.25 1981.5 1981.75 1982.0
1982.25 1982.5 1982.75 1983.0 1983.25 1983.5
1983.75 1984.0 1984.25 1984.5 1984.75 1985.0
1985.25 1985.5 1985.75 1986.0 1986.25 1986.5
1986.75 1987.0 1987.25 1987.5 1987.75 1988.0
1988.25 1988.5 1988.75 1989.0 1989.25 1989.5
1989.75 1990.0 1990.25 1990.5 1990.75 1991.0
1991.25 1991.5 1991.75 1992.0 1992.25 1992.5
1992.75 1993.0 1993.25 1993.5 1993.75 1994.0
1994.25 1994.5 1994.75 1995.0 1995.25 1995.5
1995.75 1996.0 1996.25 1996.5 1996.75 1997.0
1997.25 1997.5 1997.75 1998.0 1998.25 1998.5
1998.75 1999.0 1999.25 1999.5 1999.75 2000.0
2000.25 2000.5 2000.75 2001.0 2001.25 2001.5
2001.75 2002.0 2002.25 2002.5 2002.75 2003.0
2003.25 2003.5 2003.75 2004.0 2004.25 2004.5
2004.75 2005.0 2005.25 2005.5 2005.75 2006.0
2006.25 2006.5 2006.75 2007.0 2007.25 2007.5
2007.75 2008.0 2008.25 2008.5 2008.75 2009.0
2009.25 2009.5 2009.75 2010.0 2010.25 2010.5
2010.75 2011.0 2011.25 2011.5 2011.75 2012.0
2012.25 2012.5 2012.75 2013.0 2013.25 2013.5
2013.75 2014.0 0.33496 0.1914 0.45017 -
0.15071 2.70265 3.10543 2.99823 4.37084 3.4597
5.2559 5.40314 6.84387 7.558539999999995
6.31565 4.77344 4.022499999999996 0.67911 -
0.18765 -0.61597 -1.92614 -2.30078 -1.80632 0.79474
2.561949999999999 6.160739999999995
6.145589999999995 4.9506 4.33087
3.216089999999999 4.45285 5.762189999999995
4.98585 4.137819999999995 6.105039999999995
5.28023 6.680309999999999 6.522889999999995
2.659879999999997 2.395509999999998 1.30198
1.42855 -0.74916 -1.60646 -0.04156 1.6984
3.045869999999999 4.38676 1.29194 -

43. 2.422829999999998 -1.16866 -2.64285 -1.39556 1.594
3.34907 5.754809999999995 7.828929999999995
8.549560000000001 7.99125 6.9593
5.634829999999995 4.606819999999995 3.74335
4.33039 4.28121 4.21229 3.73976 3.17902
2.94118 2.7084 3. 38731 3.2864 4.44837
4.307319999999995 4.512079999999997 4.16963
3.836399999999998 4.297509999999995 3.74622
3.92145 2.77972 2.86704 2.45983 1.72521
0.64588 -0.91077 -0.52608 -0.07354 1.22502
2.90308 3.235889999999999 3.74232
4.326729999999999 3.30071 2.78064 2.28736
2.62438 3.43743 4.23236 4.337909999999995
4.132489999999995 3.474159999999999 2.43549
2.70725 2.27553 2.595299999999999 4.0233
4.094059999999995 4.45273 4.56304 4.3193
4.680079999999997 4.38876 4.624809999999993
4.06938 4.104569999999995 4.99812 4.9412
4.807899999999996 4.77174 4.863959999999995
4.19117 5.27253 4.08165 2.856489999999995
2.26846 0.90565 0.47008 0.18294 1.41471
1.43084 2.22974 2.0283 1.59069 1.99384
3.22073 4.34162 4.43639 4.24961
3.417079999999999 3.11999 3.62765 3.40245
3.339599999999999 3.042079999999999 3.16449 2.923
2.1794 2.410239999999999 1.24911 1.71263
2.308209999999998 1.88675 1.13592 0.86043 -
0.31054 -2.81073 -3.51317 -4.0904 -3.30713 -0.23603
1.56971 2.654469999999998 3.03281 2.76612 2.0
2977 1.85439 1.50142 2.0057 3.2738 2.77391
3.13303 1.95183 1.31521 1.63343 1.96537
2.591439999999999 1.54198 Var Consump Expend
1970.0 1970.25 1970.5 1970.75 1971.0
1971.25 1971.5 1971.75 1972.0 1972.25 1972.5
1972.75 1973.0 1973.25 1973.5 1973.75 1974.0
1974.25 1974.5 1974.75 1975.0 1975.25 1975.5

44. 1975.75 1976.0 1976.25 1976.5 1976.75 1977.0
1977.25 1977.5 1977.75 1978.0 1978.25 1978.5
1978.75 1979.0 1979.25 1979.5 1979.75 1980.0
1980.25 1980.5 1980.75 1981.0 1981.25 1981.5
1981.75 1982.0 1982.25 1982.5 1982.75 1983.0
1983.25 1983.5 1983.75 1984.0 1984.25 1984.5
1984.75 1985.0 1985.25 1985.5 1985.75 1986.0
1986.25 1986.5 1986.75 1987.0 1987.25 1987.5
1987.75 1988.0 1988.25 1988.5 1988.75 1989.0
1989.25 1989.5 1989.75 1990.0 1990.25 1990.5
1990.75 1991.0 1991.25 1991.5 1991.75 1992.0
1992.25 1992.5 1992.75 1993.0 1993.25 1993.5
1993.75 1994.0 1994.25 1994.5 1994.75 1995.0
1995.25 1995.5 1995.75 1996.0 1996.25 1996.5
1996.75 1997.0 1997.25 1997.5 1997.75 1998.0
1998.25 1998.5 1998.75 1999.0 1999.25 1999.5
1999.75 2000.0 2000.25 2000.5 2000.75 2001.0
2001.25 2001.5 2001.75 2002.0 2002.25 2002.5
2002.75 2003.0 2003.25 2003.5 2003.75 2004.0
2004.25 2004.5 2004.75 2005.0 2005.25 2005.5
2005.75 2006.0 2006.25 2006.5 2006.75 2007.0
2007.25 2007.5 2007.75 2008.0 2008.25 2008.5
2008.75 2009.0 2009.25 2009.5 2009.75 2010.0
2010.25 2010.5 2010.75 2011.0 2011.25 2011.5
2011.75 2012.0 2012.25 2012.5 2012.75 2013.0
2013.25 2013.5 2013.75 2014.0 2.56556
2.38668 2.78325 1.69302 3.00097 3.47066
3.38913 5.3927 4.77955 5.80736 6.58919
7.30873 7.84364 5.77882 4.54475 1.84539 -
0.84953 -0.46222 -0.40708 -1.5795 0.11725 1.43503
2.45845 5.08706 6.29692 5.514209999999998
5.13381 5.38827 4.50578 4.123159999999995
4.01064 4.21873 3.63572 5.26641 4.7108
3.98237 3.907249999999999 1.67531 2.24816
1.70804 1.03923 -1.1755 -1.08444 -0.03969
0.64098 2.93811 2.2505 0.15386 0.29129

45. 0.68146 1.05253 3.67452 3.98996
5.660049999999995 6.68987 6.428949999999999
6.298519999999995 5.72125 4.696519999999995
4.43501 5.317419999999995 4.810099999999998
6.00871 4.893889999999995 4.017169999999997
4.20184 4.08977 4.48722 3.6242
3.899729999999999 3.23409 2.79369 4.60377
3.93136 3.616649999999995 4.58432 3.23288
2.96171 3.10464 2.38695 2.79196 2.63063
2.031899999999998 0.81453 -0.38878 0.13389
0.21581 0.95115 3.20395 3.0471 3.65916 4.9211
3.3778 3.59551 3.61613 3.306569999999998
4.09385 3.96842 3.63174 3.82602
2.921679999999998 3.045 3.18988 2.8089
3.489059999999998 3.68262 3.35955 3.44509
3.57539 2.92721 4.06147 4.47608
4.452519999999995 5.81766 5.40659
5.698879999999995 5.71274 5.48964
5.365909999999995 5.28694 5.78693 5.1394
4.92931 4.4073 3.20561 2.532519999999999
1.86304 2.455369999999998 2.417809999999998
2.68198 3.0646 1.99181 2.17192 2.77525
3.53527 3.86661 4.40876 3.88531 3.36869
3.66714 3.44316 3.88313 3.6756 3.00391
3.328549999999999 2.801909999999999 2.65688
3.26888 2.719409999999998 2.518879999999998
2.30541 1.46336 0.67087 0.52493 -0.66003 -
1.96834 -2.093669999999999 -2.69532 -1.31083 -
0.12454 0.72941 1.97725 2.03798 3.0931 3.0851
2.63724 2.466289999999999 2.00708
2.215959999999999 2.31896 2.22171
2.040859999999999 1.87791 1.85866 1.92771 2.3307
2.0218 Investment 1970.0 1970.25 1970.5
1970.75 1971.0 1971.25 1971.5 1971.75 1972.0
1972.25 1972.5 1972.75 1973.0 1973.25 1973.5
1973.75 1974.0 1974.25 1974.5 1974.75 1975.0

46. 1975.25 1975.5 1975.75 1976.0 1976.25 1976.5
1976.75 1977.0 1977.25 1977.5 1977.75 1978.0
1978.25 1978.5 1978.75 1979.0 1979.25 1979.5
1979.75 1980.0 1980.25 1980.5 1980.75 1981.0
1981.25 1981.5 1981.75 1982.0 1982.25 1982.5
1982.75 1983.0 1983.25 1983.5 1983.75 1984.0
1984.25 1984.5 1984.75 1985.0 1985.25 1985.5
1985.75 1986.0 1986.25 1986.5 1986.75 1987.0
1987.25 1987.5 1987.75 1988.0 1988.25 1988.5
1988.75 1989.0 1989.25 1989.5 1989.75 1990.0
1990.25 1990.5 1990.75 1991.0 1991.25 1991.5
1991.75 1992.0 1992.25 1992.5 1992.75 1993.0
1993.25 1993.5 1993.75 1994.0 1994.25 1994.5
1994.75 1995.0 1995.25 1995.5 1995.75 1996.0
1996.25 1996.5 1996.75 1997.0 1997.25 1997.5
1997.75 1998.0 1998.25 1998.5 1998.75 1999.0
1999.25 1999.5 1999.75 2000.0 2000.25 2000.5
2000.75 2001.0 2001.25 2001.5 2001.75 2002.0
2002.25 2002.5 2002.75 2003.0 2003.25 2003.5
2003.75 2004.0 2004.25 2004.5 2004.75 2005.0
2005.25 2005.5 2005.75 2006.0 2006.25 2006.5
2006.75 2007.0 2007.25 2007.5 2007.75 2008.0
2008.25 2008.5 2008.75 2009.0 2009.25 2009.5
2009.75 2010.0 2010.25 2010.5 2010.75 2011.0
2011.25 2011.5 2011.75 2012.0 2012.25 2012.5
2012.75 2013.0 2013.25 2013.5 2013.75 2014.0
-6.347509999999995 -5.587709999999999 -
5.96036 -6.43551 7.684439999999995 10.50009 10.04961
13.09046 7.95626 10.94035 11.16691 14.95977
14.17364 12.64205 7.03777 10.15962 -1.8815 -
6.26847 -7.782579999999998 -10.41392 -20.2924 -
22.35554 -11.76301 -9.847290000000001 17.83125
26.25378 17.57867999999998 15.24189
9.970920000000001 13.36795 18.69101 14.85395
11.90712 11.20316 8.931190000000001 14.31907
12.32139 5.37555 0.6658 -3.35875 -

47. 4.184549999999995 -12.25097 -16.63128 -7.20071 2.10998
6.9661 20.93706 6.66168 -12.01678 -
8.324470000000001 -14.01092 -17.72272999999995 -
5.54341 2.965809999999998 10.46318 31.37218 39.21466
32.02748 26.92608 14.1703 1.25943 -0.2558 -
3.03227 1.86348 4.70318 1.1515 -0.89422 -4.13117 -
1.51479 0.28761 3.075099999999999 9.76988 1.75507
4.125219999999995 4.688979999999995 -0.49234
8.060960000000001 4.53315 3.031899999999998 0.7398
-1.60357 -0.6141 -1.68066 -6.47289 -10.46038 -
10.48691 -6.88975 2.1002 3.671679999999998
9.543259999999998 8.27297 7.765129999999996
12.36079 6.93412 5.364479999999995
7.596109999999999 9.18271 13.88847 12.77367
11.56003 8.575940000000002 1.35822 2.44317
0.84544 1.29595 8.45048 14.12227 11.31662
12.00492 12.72929 9.69533 11.28396 13.78336
7.09986 8.0264 9.52219 7.84002 8.66978
8.49296 8.614650000000001 4.655029999999995
10.8111 6.74853 3.76538 -0.11216 -6.08319 -
6.58065 -11.21601 -3.60943 -2.28997 -0.53559 4.40904
1.66599 1.18512 4.77737 8.668030000000001
7.81675 11.0863 8.94448 7.354519999999993
10.34699 5.18376 4.665989999999991 5.67521
4.108569999999998 4.75984 2.6238 -2.7253 -
4.87767 -2.939859999999995 -2.54737 -
2.171209999999999 -4.587969999999999 -
7.555129999999997 -9.568610000000001 -15.9361 -
23.03083000000001 -26.37175 -24.92307 -10.98098
3.882019999999998 16.2785 21.11312 11.10978 5.535
3.74154 1.105 9.32583 14.2874 10.10304
11.16032 3.10858 1.74181 4.42319 6.94794
8.253850000000003 3.72611

48. Unemployment
Percent of labor force
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
The unemployment rate rises during recessions and falls during
expansions.
Since the 1991 recession, the unemployment rate lags GDP
growth, particularly in recoveries. In each of the three
recessions since 1990, the unemployment rate continues rising
for a few months after the recession ends before it begins to
fall.
Source: FRED
5
Recession 1965.0 1965.25 1965.5 1965.75 1966.0
1966.25 1966.5 1966.75 1967.0 1967.25 1967.5
1967.75 1968.0 1968.25 1968.5 1968.75 1969.0
1969.25 1969.5 1969.75 1970.0 1970.25 1970.5
1970.75 1971.0 1971.25 1971.5 1971.75 1972.0
1972.25 1972.5 1972.75 1973.0 1973.25 1973.5
1973.75 1974.0 1974.25 1974.5 1974.75 1975.0
1975.25 1975.5 1975.75 1976.0 1976.25 1976.5
1976.75 1977.0 1977.25 1977.5 1977.75 1978.0
1978.25 1978.5 1978.75 1979.0 1979.25 1979.5
1979.75 1980.0 1980.25 1980.5 1980.75 1981.0
1981.25 1981.5 1981.75 1982.0 1982.25 1982.5
1982.75 1983.0 1983.25 1983.5 1983.75 1984.0
1984.25 1984.5 1984.75 1985.0 1985.25 1985.5
1985.75 1986.0 1986.25 1986.5 1986.75 1987.0
1987.25 1987.5 1987.75 1988.0 1988.25 1988.5
1988.75 1989.0 1989.25 1989.5 1989.75 1990.0
1990.25 1990.5 1990.75 1991.0 1991.25 1991.5
1991.75 1992.0 1992.25 1992.5 1992.75 1993.0

49. 1993.25 1993.5 1993.75 1994.0 1994.25 1994.5
1994.75 1995.0 1995.25 1995.5 1995.75 1996.0
1996.25 1996.5 1996.75 1997.0 1997.25 1997.5
1997.75 1998.0 1998.25 1998.5 1998.75 1999.0
1999.25 1999.5 1999.75 2000.0 2000.25 2000.5
2000.75 2001.0 2001.25 2001.5 2001.75 2002.0
2002.25 2002.5 2002.75 2003.0 2003.25 2003.5
2003.75 2004.0 2004.25 2004.5 2004.75 2005.0
2005.25 2005.5 2005.75 2006.0 2006.25 2006.5
2006.75 2007.0 2007.25 2007.5 20 07.75
2008.0 2008.25 2008.5 2008.75 2009.0
2009.25 2009.5 2009.75 2010.0 2010.25 2010.5
2010.75 2011.0 2011.25 2011.5 2011.75 2012.0
2012.25 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 100.0 100.0 100.0
100.0 100.0 100.0 Unemployment Rate 1965.0
1965.25 1965.5 1965.75 1966.0 1966.25 1966.5
1966.75 1967.0 1967.25 1967.5 1967.75 1968.0
1968.25 1968.5 1968.75 1969.0 1969.25 1969.5
1969.75 1970.0 1970.25 1970.5 1970.75 1971.0
1971.25 1971.5 1971.75 1972.0 197 2.25 1972.5
1972.75 1973.0 1973.25 1973.5 1973.75 1974.0
1974.25 1974.5 1974.75 1975.0 1975.25 1975.5
1975.75 1976.0 1976.25 1976.5 1976.75 1977.0
1977.25 1977.5 1977.75 1978.0 1978.25 1978.5
1978.75 1979.0 1979.25 1979.5 1979.75 1980.0
1980.25 1980.5 1980.75 1981.0 1981.25 1981.5
1981.75 1982.0 1982.25 1982.5 1982.75 1983.0
1983.25 1983.5 1983.75 1984.0 1984.25 1984.5
1984.75 1985.0 1985.25 1985.5 1985.75 1986.0
1986.25 1986.5 1986.75 1987.0 1987.25 1987.5
1987.75 1988.0 1988.25 1988.5 1988.75 1989.0
1989.25 1989.5 1989.75 1990.0 1990.25 1990.5

50. 1990.75 1991.0 1991.25 1991.5 1991.75 1992.0
1992.25 1992.5 1992.75 1993.0 1993.25 1993.5
1993.75 1994.0 1994.25 1994.5 1994.75 1995.0
1995.25 1995.5 1995.75 1996.0 1996.25 1996.5
1996.75 1997.0 1997.25 1997.5 1997.75 1998.0
1998.25 1998.5 1998.75 1999.0 1999.25 1999.5
1999.75 2000.0 2000.25 2000.5 2000.75 2001.0
2001.25 2001.5 2001.75 2002.0 2002.25 2002.5
2002.75 2003.0 2003.25 2003.5 2003.75 2004.0
2004.25 2004.5 2004.75 2005.0 2005.25 2005.5
2005.75 2006.0 2006.25 2006.5 2006.75 2007.0
2007.25 2007.5 2007.75 2008.0 2008.25 2008.5
2008.75 2009.0 2009.25 2009.5 2009.75 2010.0
2010.25 2010.5 2010.75 2011.0 2011.25 2011.5
2011.75 2012.0 2012.25 2012.5 2012.75 2013.0
2013.25 2013.5 2013.75 2014.0 4.9 4.7 4.4
4.1 3.9 3.8 3.8 3.7 3.8 3.8 3.8 3.9 3.7 3.6
3.5 3.4 3.4 3.4 3.6 3.6 4.2 4.8 5.2 5.8 5.9
5.9 6.0 5.9 5.8 5.7 5.6 5.4 4.9 4.9 4.8 4.8
5.1 5.2 5.6 6.6 8.3 8.9 8.5 8.3 7.7 7.6 7.7
7.8 7.5 7.1 6.9 6.7 6.3 6.0 6.0 5.9 5.9 5.7
5.9 6.0 6.3 7.3 7.7 7.4 7.4 7.4 7.4
8.200000000000001 8.8 9.4 9.9 10.7 10.4 10.1 9.4
8.5 7.9 7.4 7.4 7.3 7.2 7.3 7.2 7.0 7.0 7.2
7.0 6.8 6.6 6.3 6.0 5.8 5.7 5.5 5.5 5.3 5.2
5.2 5.2 5.4 5.3 5.3 5.7 6.1 6.6 6.8 6.9 7.1
7.4 7.6 7.6 7.4 7.1 7.1 6.8 6.6 6.6 6.2 6.0
5.6 5.5 5.7 5.7 5.6 5.5 5.5 5.3 5.3 5.2 5.0
4.9 4.7 4.6 4.4 4.5 4.4 4.3 4.3 4.2 4.1 4.0
3.9 4.0 3.9 4.2 4.4 4.8 5.5 5.7 5.8 5.7 5.9
5.9 6.1 6.1 5.8 5.7 5.6 5.4 5.4 5.3 5.1 5.0
5.0 4.7 4.6 4.6 4.4 4.5 4.5 4.7 4.8 5.0 5.3
6.0 6.9 8.3 9.3 9.6 9.9 9.8 9.6 9.5 9.6 9.0
9.1 9.0 8.6 8.200000000000001 8.200000000000001
8.0 7.8 7.7 7.5 7.2 7.0 6.7

51. Okun’s Law
Percentage change in real GDP
Change in unemployment rate
1975
1982
1991
2001
1984
1951
1966
2003
1987
2008
1971
2009
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
A replica of Figure 10.4, p.278.

52. The boxed equation in the upper right is the Okun’s law
equation shown on p.278, the equation of the blue trend line.
6
Year -2.3 0.0 0.0 2.5 -1.099999999999999 -0.4 0.3
2.7 -1.599999999999999 0.2 1.0 -1.2 0.0 -
0.600000000000001 -0.6 -0.8 -0.1 -0.2 -0.1 1.6 0.9 -0.3 -
0.8 0.7 3.0 -0.800000000000001 -0.8 -1.0 -0.2
1.800000000000001 0.5 2.5 0.0 -2.5 -0.4 -
0.0999999999999997 -0.7 -0.7 -0.3 0.5 1.5 0.7 -0.7 -
1.0 -0.600000000000001 -0.199999999999999 -0.5 -
0.5 -0.300000000000001 -0.2 0.9 1.100000000000001
0.4 -0.7 -0.5 -0.5 0.100000000000001
1.399999999999999 4.200000000000001
0.199999999999999 8.745976302992938
7.733971532938668 3.829065824856757
4.605596531726825 -0.635125679530664
7.20437679432318 1.975645495427205
2.011693588346063 -0.898581698076561
7.170514140077436 2.478734107747195
2.329525169582284 6.057566506759695
4.37106788930467 5.787565991647615
6.42061748165804 6.516185476815394
2.526530209941841 4.842017560725487
3.105419201026984 0.192689651083523
3.355228120007097 5.313179892362288
5.795368054800493 -0.552415210688601 -
0.211858932954401 5.364679077233776 4.597616414792977
5.577221256401812 3.126390743213176 -
0.276189448699968 2.538027132873188 -1.941337834986288
4.519044544867659 7.185505456042828
4.13753361505954 3.464049876415686
3.200099835983744 4.109731027691878
3.574154581355994 1.876001281640498 -
0.234309886619177 3.393650893729699 2.852351551185296
4.073162778288331 2.515167915230588
3.739927757710465 4.456824512534823

53. 4.355128205128207 4.826959224541429
4.138246255537592 1.079262185308983
1.813708025296151 2.541418338892244
3.468097132314513 3.07046927984663
2.658000000000001 1.913148512536771 -
0.33644931276405 -3.486141747386584
3.029761017538622
Index of Leading Economic Indicators
Published monthly by the Conference Board.
Aims to forecast changes in economic activity
6-9 months into the future.
Used in planning by businesses and govt, despite not being a
perfect predictor.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
7
Components of the LEI index
Average workweek in manufacturing
Initial weekly claims for unemployment insurance
New orders for consumer goods and materials
New orders, nondefense capital goods
Vendor performance
New building permits issued
Index of stock prices
M2
Yield spread (10-year minus 3-month) on Treasuries
Index of consumer expectations
‹#›

54. CHAPTER 10 Introduction to Economic Fluctuations
8
I’ve abbreviated some of the names to fit more neatly on this
slide.
Pp. 279–80 provides a full list of complete names and a
discussion of the role of each component in helping forecast
economic activity.
Index of Leading Economic Indicators, 1970-2012
Source:
Conference Board
2004 = 100
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
The index turns downward a few months to a year before each
recession. It also turns upward just prior to the end of almost
every recession.
Source: Conference Board. http://www.conference-board.org
9
Recession 1970.083333333333 1970.166666666667 1970.25
1970.333333333333 1970.416666666667 1970.5
1970.583333333333 1970.666666666667 1970.75
1970.833333333333 1970.916666666667 1971.0
1971.08333333334 1971.16666666667 1971.25
1971.33333333334 1971.41666666667 1971.5
1971.58333333334 1971.66666666667 1971.75
1971.83333333334 1971.91666666667 1972.0
1972.08333333334 1972.16666666667 1972.25
1972.33333333334 1972.41666666667 1972.5
1972.58333333334 1972.66666666667 1972.75
1972.83333333334 1972.91666666667

55. 1973.00000000001 1973.08333333334
1973.16666666667 1973.25000000001
1973.33333333334 1973.41666666667
1973.50000000001 1973.58333333334
1973.66666666667 1973.75000000001
1973.83333333334 1973.91666666667
1974.00000000001 1974.08333333334
1974.16666666667 1974.25000000001
1974.33333333334 1974.41666666667
1974.50000000001 1974.58333333334
1974.66666666667 1974.75000000001
1974.83333333334 1974.91666666668
1975.00000000001 1975.08333333334
1975.16666666668 1975.25000000001
1975.33333333334 1975.41666666668
1975.50000000001 1975.58333333334
1975.66666666668 1975.75000000001
1975.83333333334 1975.91666666668
1976.00000000001 1976.08333333334
1976.16666666668 1976.25000000001
1976.33333333334 1976.41666666668
1976.50000000001 1976.58333333335
1976.66666666668 1976.75000000001
1976.83333333335 1976.91666666668
1977.00000000001 1977.08333333335
1977.16666666668 1977.25000000001
1977.33333333335 1977.41666666668
1977.50000000001 1977.58333333335
1977.66666666668 1977.75000000001
1977.83333333335 1977.91666666668
1978.00000000001 1978.08333333335
1978.16666666668 1978.25000000001
1978.33333333335 1978.41666666668
1978.50000000002 1978.58333333335
1978.66666666668 1978.75000000002
1978.83333333335 1978.91666666668

56. 1979.00000000002 1979.08333333335
1979.16666666668 1979.25000000002
1979.33333333335 1979.41666666668
1979.50000000002 1979.58333333335
1979.66666666668 1979.75000000002
1979.83333333335 1979.91666666668
1980.00000000002 1980.08333333335
1980.16666666668 1980.25000000002
1980.33333333335 1980.41666666669
1980.50000000002 1980.58333333335
1980.66666666669 1980.75000000002
1980.83333333335 1980.91666666669
1981.00000000002 1981.08333333335
1981.16666666669 1981.25000000002
1981.33333333335 1981.41666666669
1981.50000000002 1981.58333333335
1981.66666666669 1981.75000000002
1981.83333333335 1981.91666666669
1982.00000000002 1982.08333333336
1982.16666666669 1982.25000000002
1982.33333333336 1982.41666666669
1982.50000000002 1982.58333333336
1982.66666666669 1982.75000000002
1982.83333333336 1982.91666666669
1983.00000000002 1983.08333333336
1983.16666666669 1983.25000000002
1983.33333333336 1983.41666666669
1983.50000000002 1983.58333333336
1983.66666666669 1983.75000000002
1983.83333333336 1983.91666666669
1984.00000000003 1984.08333333336
1984.16666666669 1984.25000000003
1984.33333333336 1984.41666666669
1984.50000000003 1984.58333333336
1984.66666666669 1984.75000000003
1984.83333333336 1984.91666666669

57. 1985.00000000003 1985.08333333336 1985.166666666
69 1985.25000000003 1985.33333333336
1985.41666666669 1985.50000000003
1985.58333333336 1985.66666666669
1985.75000000003 1985.83333333336 1985.9166666667
1986.00000000003 1986.08333333336 1986.1666666667
1986.25000000003 1986.33333333336 1986.4166666667
1986.50000000003 1986.58333333336 1986.6666666667
1986.75000000003 1986.83333333336 1986.9166666667
1987.00000000003 1987.08333333336 1987.1666666667
1987.25000000003 1987.33333333336 1987.4166666667
1987.50000000003 1987.58333333337 1987.6666666667
1987.75000000003 1987.83333333337 1987.9166666667
1988.00000000003 1988.08333333337 1988.1666666667
1988.25000000003 1988.33333333337 1988.4166666667
1988.50000000003 1988.58333333337 1988.6666666667
1988.75000000003 1988.83333333337 1988.9166666667
1989.00000000003 1989.08333333337 1989.1666666667
1989.25000000003 1989.33333333337 1989.4166666667
1989.50000000004 1989.58333333337 1989.6666666667
1989.75000000004 1989.83333333337 1989.9166666667
1990.00000000004 1990.08333333337 1990.1666666667
1990.25000000004 1990.33333333337 1990.4166666667
1990.50000000004 1990.58333333337 1990.6666666667
1990.75000000004 1990.83333333337 1990.9166666667
1991.00000000004 1991.08333333337 1991.1666666667
1991.25000000004 1991.33333333337
1991.41666666671 1991.50000000004
1991.58333333337 1991.66666666671
1991.75000000004 1991.83333333337
1991.91666666671 1992.00000000004
1992.08333333337 1992.16666666671
1992.25000000004 1992.33333333337
1992.41666666671 1992.50000000004
1992.58333333337 1992.66666666671
1992.75000000004 1992.83333333337

58. 1992.91666666671 1993.00000000004
1993.08333333338 1993.16666666671
1993.25000000004 1993.33333333338
1993.41666666671 1993.50000000004
1993.58333333338 1993.66666666671
1993.75000000004 1993.83333333338
1993.91666666671 1994.00000000004
1994.08333333338 1994.16666666671
1994.25000000004 1994.33333333338
1994.41666666671 1994.50000000004
1994.58333333338 1994.66666666671
1994.75000000004 1994.83333333338
1994.91666666671 1995.00000000005
1995.08333333338 1995.16666666671
1995.25000000005 1995.33333333338
1995.41666666671 1995.50000000005
1995.58333333338 1995.66666666671
1995.75000000005 1995.83333333338
1995.91666666671 1996.00000000005
1996.08333333338 1996.16666666671
1996.25000000005 1996.33333333338
1996.41666666671 1996.50000000005
1996.58333333338 1996.66666666671
1996.75000000005 1996.83333333338
1996.91666666672 1997.00000000005
1997.08333333338 1997.16666666672
1997.25000000005 1997.33333333338
1997.41666666672 1997.50000000005
1997.58333333338 1997.66666666672
1997.75000000005 1997.83333333338
1997.91666666672 1998.00000000005
1998.08333333338 1998.16666666672
1998.25000000005 1998.33333333338
1998.41666666672 1998.50000000005
1998.58333333339 1998.66666666672
1998.75000000005 1998.83333333339

59. 1998.91666666672 1999.00000000005
1999.08333333339 1999.16666666672
1999.25000000005 1999.33333333339
1999.41666666672 1999.50000000005
1999.58333333339 1999.66666666672
1999.75000000005 1999.83333333339
1999.91666666672 2000.00000000005
2000.08333333339 2000.16666666672
2000.25000000005 2000.33333333339
2000.41666666672 2000.50000000006
2000.58333333339 2000.66666666672
2000.75000000006 2000.83333333339
2000.91666666672 2001.00000000006
2001.08333333339 2001.16666666672
2001.25000000006 2001.33333333339
2001.41666666672 2001.50000000006
2001.58333333339 2001.66666666672
2001.75000000006 2001.83333333339
2001.91666666672 2002.00000000006
2002.08333333339 2002.16666666672
2002.25000000006 2002.33333333339
2002.41666666673 2002.50000000006
2002.58333333339 2002.66666666673
2002.75000000006 2002.83333333339
2002.91666666673 2003.00000000006
2003.08333333339 2003.16666666673
2003.25000000006 2003.33333333339
2003.41666666673 2003.50000000006
2003.58333333339 2003.66666666673
2003.75000000006 2003.83333333339
2003.91666666673 2004.00000000006 2004.0833333334
2004.16666666673 2004.25000000006 2004.3333333334
2004.41666666673 2004.50000000006 2004.5833333334
2004.66666666673 2004.75000000006 2004.8333333334
2004.91666666673 2005.00000000006 2005.0833333334
2005.16666666673 2005.25000000006 2005.3333333334

60. 2005.41666666673 2005.50000000006 2005.5833333334
2005.66666666673 2005.75000000006 2005.8333333334
2005.91666666673 2006.00000000007 2006.0833333334
2006.16666666673 2006.25000000007 2006.3333333334
2006.41666666673 2006.50000000007 2006.5833333334
2006.66666666673 2006.75000000007 2006.8333333334
2006.91666666673 2007.00000000007 2007.0833333334
2007.16666666673 2007.25000000007 2007.3333333334
2007.41666666673 2007.50000000007 2007.5833333334
2007.66666666673 2007.75000000007 2007.8333333334
2007.91666666674 2008.00000000007 2008.0833333334
2008.16666666674 2008.25000000007 2008.3333333334
2008.41666666674 2008.50000000007 2008.5833333334
2008.66666666674 2008.75000000007 2008.8333333334
2008.91666666674 2009.00000000007 2009.0833333334
2009.16666666674 2009.25000000007 2009.3333333334
2009.41666666674 2009.50000000007
2009.58333333341 2009.66666666674
2009.75000000007 2009.83333333341
2009.91666666674 2010.00000000007
2010.08333333341 2010.16666666674
2010.25000000007 2010.33333333341
2010.41666666674 2010.50000000007
2010.58333333341 2010.66666666674
2010.75000000007 2010.83333333341
2010.91666666674 2011.00000000007
2011.08333333341 2011.16666666674
2011.25000000007 2011.33333333341
2011.41666666674 2011.50000000008
2011.58333333341 2011.66666666674
2011.75000000008 2011.83333333341
2011.91666666674 2012.00000000008
2012.08333333341 2012.16666666674
2012.25000000008 2012.33333333341 1.0 1.0 1.0
1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

61. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
1.0 1.0 1.0 Index 1970.083333333333
1970.166666666667 1970.25 1970.333333333333
1970.416666666667 1970.5 1970.583333333333
1970.666666666667 1970.75 1970.833333333333
1970.916666666667 1971.0 1971.08333333334
1971.16666666667 1971.25 1971.33333333334
1971.41666666667 1971.5 1971.58333333334
1971.66666666667 1971.75 1971.83333333334
1971.91666666667 1972.0 1972.08333333334
1972.16666666667 1972.25 1972.33333333334
1972.41666666667 1972.5 1972.58333333334
1972.66666666667 1972.75 1972.83333333334
1972.91666666667 1973.00000000001
1973.08333333334 1973.16666666667
1973.25000000001 1973.33333333334
1973.41666666667 1973.50000000001
1973.58333333334 1973.66666666667
1973.75000000001 1973.83333333334
1973.91666666667 1974.00000000001
1974.08333333334 1974.16666666667
1974.25000000001 1974.33333333334
1974.41666666667 1974.50000000001
1974.58333333334 1974.66666666667
1974.75000000001 1974.83333333334
1974.91666666668 1975.00000000001
1975.08333333334 1975.16666666668
1975.25000000001 1975.33333333334
1975.41666666668 1975.50000000001
1975.58333333334 1975.66666666668
1975.75000000001 1975.83333333334
1975.91666666668 1976.00000000001

62. 1976.08333333334 1976.16666666668
1976.25000000001 1976.33333333334
1976.41666666668 1976.50000000001
1976.58333333335 1976.66666666668
1976.75000000001 1976.83333333335
1976.91666666668 1977.00000000001
1977.08333333335 1977.16666666668
1977.25000000001 1977.33333333335
1977.41666666668 1977.50000000001
1977.58333333335 1977.66666666668
1977.75000000001 1977.83333333335
1977.91666666668 1978.00000000001
1978.08333333335 1978.16666666668
1978.25000000001 1978.33333333335
1978.41666666668 1978.50000000002
1978.58333333335 1978.66666666668
1978.75000000002 1978.83333333335
1978.91666666668 1979.00000000002
1979.08333333335 1979.16666666668
1979.25000000002 1979.33333333335
1979.41666666668 1979.50000000002
1979.58333333335 1979.66666666668
1979.75000000002 1979.83333333335
1979.91666666668 1980.00000000002
1980.08333333335 1980.16666666668
1980.25000000002 1980.33333333335
1980.41666666669 1980.50000000002
1980.58333333335 1980.66666666669
1980.75000000002 1980.83333333335
1980.91666666669 1981.00000000002
1981.08333333335 1981.16666666669
1981.25000000002 1981.33333333335
1981.41666666669 1981.50000000002
1981.58333333335 1981.66666666669
1981.75000000002 1981.83333333335
1981.91666666669 1982.00000000002

63. 1982.08333333336 1982.16666666669
1982.25000000002 1982.33333333336
1982.41666666669 1982.50000000002
1982.58333333336 1982.66666666669
1982.75000000002 1982.83333333336
1982.91666666669 1983.00000000002
1983.08333333336 1983.16666666669
1983.25000000002 1983.33333333336
1983.41666666669 1983.50000000002
1983.58333333336 1983.66666666669
1983.75000000002 1983.83333333336
1983.91666666669 1984.00000000003
1984.08333333336 1984.16666666669
1984.25000000003 1984.33333333336
1984.41666666669 1984.50000000003
1984.58333333336 1984.66666666669
1984.75000000003 1984.83333333336
1984.91666666669 1985.00000000003
1985.08333333336 1985.16666666669
1985.25000000003 1985.33333333336
1985.41666666669 1985.50000000003
1985.58333333336 1985.66666666669
1985.75000000003 1985.83333333336 1985.9166666667
1986.00000000003 1986.08333333336 1986.1666666667
1986.25000000003 1986.33333333336 1986.4166666667
1986.50000000003 1986.58333333336 1986.6666666667
1986.75000000003 1986.83333333336 1986.9166666667
1987.00000000003 1987.08333333336 1987.1666666667
1987.25000000003 1987.33333333336 1987.4166666667
1987.50000000003 1987.58333333337 1987.6666666667
1987.75000000003 1987.83333333337 1987.9166666667
1988.00000000003 1988.08333333337 1988.1666666667
1988.25000000003 1988.33333333337 1988.4166666667
1988.50000000003 1988.58333333337 1988.6666666667
1988.75000000003 1988.83333333337 1988.9166666667
1989.00000000003 1989.08333333337 1989.1666666667

64. 1989.25000000003 1989.33333333337 1989.4166666667
1989.50000000004 1989.58333333337 1989.6666666667
1989.75000000004 1989.83333333337 1989.9166666667
1990.00000000004 1990.08333333337 1990.1666666667
1990.25000000004 1990.33333333337 1990.4166666667
1990.50000000004 1990.58333333337 1990.6666666667
1990.75000000004 1990.83333333337 1990.9166666667
1991.00000000004 1991.08333333337 1991.1666666667
1991.25000000004 1991.33333333337
1991.41666666671 1991.50000000004
1991.58333333337 1991.66666666671
1991.75000000004 1991.83333333337
1991.91666666671 1992.00000000004
1992.08333333337 1992.16666666671
1992.25000000004 1992.33333333337
1992.41666666671 1992.50000000004
1992.58333333337 1992.66666666671
1992.75000000004 1992.83333333337
1992.91666666671 1993.00000000004
1993.08333333338 1993.16666666671
1993.25000000004 1993.33333333338
1993.41666666671 1993.50000000004
1993.58333333338 1993.66666666671
1993.75000000004 1993.83333333338
1993.91666666671 1994.00000000004
1994.08333333338 1994.16666666671
1994.25000000004 1994.33333333338
1994.41666666671 1994.50000000004
1994.58333333338 1994.66666666671
1994.75000000004 1994.83333333338
1994.91666666671 1995.00000000005
1995.08333333338 1995.16666666671
1995.25000000005 1995.33333333338
1995.41666666671 1995.50000000005
1995.58333333338 1995.66666666671
1995.75000000005 1995.83333333338

65. 1995.91666666671 1996.00000000005
1996.08333333338 1996.16666666671
1996.25000000005 1996.33333333338
1996.41666666671 1996.50000000005
1996.58333333338 1996.66666666671
1996.75000000005 1996.83333333338
1996.91666666672 1997.00000000005
1997.08333333338 1997.16666666672
1997.25000000005 1997.33333333338
1997.41666666672 1997.50000000005
1997.58333333338 1997.66666666672
1997.75000000005 1997.83333333338
1997.91666666672 1998.00000000005
1998.08333333338 1998.16666666672
1998.25000000005 1998.33333333338
1998.41666666672 1998.50000000005
1998.58333333339 1998.66666666672
1998.75000000005 1998.83333333339
1998.91666666672 1999.00000000005
1999.08333333339 1999.16666666672
1999.25000000005 1999.33333333339
1999.41666666672 1999.50000000005
1999.58333333339 1999.66666666672
1999.75000000005 1999.83333333339
1999.91666666672 2000.00000000005
2000.08333333339 2000.16666666672
2000.25000000005 2000.33333333339
2000.41666666672 2000.50000000006
2000.58333333339 2000.66666666672
2000.75000000006 2000.83333333339
2000.91666666672 2001.00000000006
2001.08333333339 2001.16666666672
2001.25000000006 2001.33333333339
2001.41666666672 2001.50000000006
2001.58333333339 2001.66666666672
2001.75000000006 2001.83333333339

66. 2001.91666666672 2002.00000000006
2002.08333333339 2002.16666666672
2002.25000000006 2002.33333333339
2002.41666666673 2002.50000000006
2002.58333333339 2002.66666666673
2002.75000000006 2002.83333333339
2002.91666666673 2003.00000000006
2003.08333333339 2003.16666666673
2003.25000000006 2003.33333333339
2003.41666666673 2003.50000000006
2003.58333333339 2003.66666666673
2003.75000000006 2003.83333333339
2003.91666666673 2004.00000000006 2004.0833333334
2004.16666666673 2004.25000000006 2004.3333333334
2004.41666666673 2004.50000000006 2004.5833333334
2004.66666666673 2004.75000000006 2004.8333333334
2004.91666666673 2005.00000000006 2005.0833333334
2005.16666666673 2005.25000000006 2005.3333333334
2005.41666666673 2005.50000000006 2005.5833333334
2005.66666666673 2005.75000000006 2005.8333333334
2005.91666666673 2006.00000000007 2006.0833333334
2006.16666666673 2006.25000000007 2006.3333333334
2006.41666666673 2006.50000000007 2006.5833333334
2006.66666666673 2006.75000000007 2006.8333333334
2006.91666666673 2007.00000000007 2007.0833333334
2007.16666666673 2007.25000000007 2007.3333333334
2007.41666666673 2007.50000000007 2007.5833333334
2007.66666666673 2007.75000000007 2007.8333333334
2007.91666666674 2008.00000000007 2008.0833333334
2008.16666666674 2008.25000000007 2008.3333333334
2008.41666666674 2008.50000000007 2008.5833333334
2008.66666666674 2008.75000000007 2008.8333333334
2008.91666666674 2009.00000000007 2009.0833333334
2009.16666666674 2009.25000000007 2009.3333333334
2009.41666666674 2009.50000000007
2009.58333333341 2009.66666666674

67. 2009.75000000007 2009.83333333341
2009.91666666674 2010.00000000007
2010.08333333341 2010.16666666674
2010.25000000007 2010.33333333341
2010.41666666674 2010.50000000007
2010.58333333341 2010.66666666674
2010.75000000007 2010.83333333341
2010.91666666674 2011.00000000007
2011.08333333341 2011.16666666674
2011.25000000007 2011.33333333341
2011.41666666674 2011.50000000008
2011.58333333341 2011.66666666674
2011.75000000008 2011.83333333341
2011.91666666674 2012.00000000008
2012.08333333341 2012.16666666674
2012.25000000008 2012.33333333341 44.1 43.8 43.5
43.1 43.1 43.1 43.3 43.4 43.4 43.3 43.3 43.9 44.1 44.6
45.0 45.1 45.5 45.6 45.7 45.9 46.1 46.4 46.5 47.1 47.5
48.1 48.5 48.8 49.0 49.4 49.7 50.4 50.9 51.4 51.9 52.5
52.8 53.0 52.9 52.7 52.6 52.5 52.2 51.7 51.5 51.4 51.2
50.6 50.3 49.9 49.8 49.2 48.9 48.4 47.9 47.1 46.2 45.6
44.9 44.1 43.7 43.6 43.5 44.0 44.3 44.7 45.1 45.3 45.4
45.8 46.0 46.2 46.9 47.6 47.8 48.0 48.4 48.5 49.0 49.2
49.5 49.6 50.1 50.6 50.6 50.9 51.6 51.8 52.1 52.4 52.5
52.7 52.8 52.9 53.1 53.2 52.8 53.2 53.6 54.3 54.5 54.8
54.7 55.0 55.2 55.3 55.0 55.1 54.7 54.7 55.2 54.2 54.6
54.3 53.9 53.6 53.4 52.9 52.3 51.9 51.8 51.6 50.4 48.9
48.3 48.5 48.9 49.3 49.7 50.1 50.1 49.9 49.2 48.9 49.1
49.3 49.0 48.6 48.2 48.0 47.4 47.0 46.8 46.7 46.2 46.5
46.3 46.3 46.1 45.8 45.9 45.6 45.9 46.1 46.3 46.7 47.5
48.0 48.6 49.0 49.7 50.4 50.9 51.1 51.7 52.4 52.7 53.3
53.9 54.4 54.4 54.6 55.1 55.2 55.3 55.2 55.2 55.3 55.8
56.1 56.5 56.9 57.0 57.0 57.3 57.7 57.9 58.1 58.4 58.4
58.7 58.9 59.2 59.4 59.4 59.8 60.0 60.5 60.4 60.5 60.8
60.9 61.1 61.6 61.6 62.1 62.2 62.3 62.4 62.8 63.1 63.2
63.6 63.7 63.5 63.5 63.6 64.3 64.7 64.7 64.9 65.3 65.3

68. 65.5 65.6 65.9 66.0 66.1 66.2 66.1 65.6 65.8 65.6 65.6
65.1 65.5 65.5 65.2 65.3 65.4 65.3 65.1 65.1 64.8 64.8
64.9 64.6 63.8 63.0 62.2 61.2 60.7 60.0 59.8 59.6 60.2
60.6 60.7 61.4 61.5 61.9 62.0 61.9 61.8 62.3 62.5 63.1
63.6 64.1 64.5 64.7 65.0 65.2 65.4 66.0 66.9 67.3 67.8
67.7 68.3 68.4 68.6 68.7 69.2 69.5 69.8 70.2 71.2 71.1
71.3 72.4 72.8 73.3 73.9 74.2 74.9 75.3 75.9 76.2 76.7
77.0 77.0 76.9 77.0 77.0 77.0 77.1 77.5 77.8 77.7 77.7
77.8 76.5 77.4 77.6 78.1 78.7 79.2 79.2 79.5 79.8 80.0
80.6 80.7 81.3 82.3 82.7 82.8 83.5 84.1 85.1 85.2 85.9
86.3 86.5 87.0 87.0 87.9 88.1 88.1 88.5 88.1 88.4 88.6
88.1 87.8 88.1 88.4 88.3 89.0 89.1 89.2 89.7 90.0 90.4
90.7 90.8 91.2 91.8 92.6 93.3 92.8 93.7 93.8 93.1 93.3
93.0 92.5 92.8 92.1 91.4 90.0 89.6 88.6 87.4 86.6 86.9
86.4 86.3 86.2 84.7 84.2 84.7 85.5 85.5 86.3 86.7 87.3
88.2 88.5 88.1 88.3 88.0 88.0 88.5 88.5 88.8 88.5 88.5
88.2 89.2 89.9 90.3 90.9 92.0 93.1 94.1 95.1 96.0 96.9
98.3 98.5 99.3 99.7 100.4 101.0 101.6 101.9
102.7 103 .8 104.2 104.8 104.6 105.2
105.0 105.8 105.9 106.6 106.0 106.4
107.0 107.2 108.1 108.2 108.5 107.9
107.4 107.5 107.0 106.7 106.7 106.5
106.4 107.0 106.7 106.8 107.1 106.9
107.0 106.7 106.6 106.0 105.4 104.8
103.9 103.0 101.9 101.0 99.5 99.0 98.1
97.5 95.4 94.1 92.0 89.2 86.8 84.5 82.9 81.8 80.4 80.7
81.1 81.7 82.4 83.1 83.7 84.3 85.2 86.3 86.8 86.9 88.4
88.9 89.0 88.9 89.1 89.2 89.7 89.8 90.5 91.7 91.8 92.7
93.7 93.7 94.2 94.2 94.4 93.7 93.2 93.8 94.1 94.5 94.6
95.3 95.6 95.5
Time horizons in macroeconomics
Long run
Prices are flexible, respond to changes in supply or demand.

69. Short run
Many prices are “sticky” at a predetermined level.
The economy behaves much differently when prices are sticky.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
10
The material on this slide was introduced in Chapter 1, but it’s
probably worth repeating at this point, especially since the
behavior of prices is so critical for understanding short-run
fluctuations.
Sticky prices are a fact of everyday life, even if most adults
have not heard the term “sticky prices” or studied the
implications of sticky prices for short-run economic
fluctuations.
Recap of classical macro theory
(Chaps. 3-8)
Output is determined by the supply side:
supplies of capital, labor
technology
Changes in demand for goods & services
(C, I, G ) only affect prices, not quantities.
Assumes complete price flexibility.
Applies to the long run.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
11
Classical macroeconomic theory is what your learned in the first
part of the course. This slide recaps an important lesson from
classical theory, which stands in sharp contrast to what we are

70. about to cover now.
When prices are sticky…
…output and employment also depend on demand, which is
affected by:
fiscal policy (G and T )
monetary policy (M )
other factors, like exogenous changes in
C or I
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
12
Chapters 10–12 focus on the closed economy case.
In an open economy, the list of things that affect aggregate
demand is a bit larger. (See Chapter 13.)
The model of
aggregate demand and supply
The paradigm most mainstream economists
and policymakers use to think about economic fluctuations and
policies to stabilize the economy
Shows how the price level and aggregate output are determined
Shows how the economy’s behavior is different
in the short run and long run
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
13
Aggregate demand

71. The aggregate demand curve shows the relationship between the
price level and the quantity of output demanded.
For this chapter’s intro to the AD/AS model,
we use a simple theory of aggregate demand based on the
quantity theory of money.
Chapters 10–12 develop the theory of aggregate demand in more
detail.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
14
The Quantity Equation as
Aggregate Demand
From Chapter 4, recall the quantity equation
M V = P Y
For given values of M and V,
this equation implies an inverse relationship between P and Y
…
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
15
The downward-sloping AD curve
An increase in the price level causes a fall in real money
balances (M/P ),
causing a decrease in the demand for goods & services.
Y
P

72. AD
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
16
The textbook explains different ways of thinking about the AD
curve’s slope.
Here’s one that uses the idea of the simple money demand
function introduced in chapter 5 (M/P = kY, where k = 1/V):
An increase in the price level causes a fall in real money
balances, and therefore a fall in the demand for goods &
services (because the demand for output is proportional to real
money balances according to the simple money demand function
implied by the quantity theory of money).
Here’s an explanation of the AD curve slope that doesn’t refer
to the simple money demand function:
An increase in P reduces real money balances. In order to buy
the same amount of stuff, velocity would have to increase. But,
by definition, velocity is constant along the AD curve. For
simplicity, suppose V = 1. With lower real money balances (or,
equivalently, the same nominal balances but higher goods
prices), people demand a smaller quantity of goods and
services.
Shifting the AD curve
An increase in the money supply shifts the AD curve to the
right.
Y
P
AD1

73. AD2
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
17
For future reference (a bunch of slides later in this chapter), it
will be useful to see how a change in M shifts the AD curve.
Page 287 discusses the shift. Here’s the idea: With velocity
fixed, the quantity equation implies that PY is determined by M.
An increase in M causes an increase in PY, which means higher
Y for each value of P, or higher P for each value of Y.
Or: for a given value of P, an increase in M implies higher real
money balances. In the simple money demand function
associated with the quantity theory, the demand for real
balances is proportional to the demand for output, so output
must rise at each P in order for real money demand to rise and
equal the new, higher supply of real balances M/P.
Or, if you prefer, just take on faith that an increase in the
money supply shifts the AD curve to the right for now, you will
learn how this works in Chapters 11 and 12.
Aggregate supply in the long run
Recall from Chap. 3:
In the long run, output is determined by
factor supplies and technology
is the full-employment or natural level of output, at which
the economy’s resources are fully employed.

74. “Full employment” means that
unemployment equals its natural rate (not zero).
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
18
Some textbooks also use the term “potential GDP” to mean the
full-employment level of output.
The long-run aggregate supply curve
Y
P
LRAS
does not depend on P,
so LRAS is vertical.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
19
Sometimes it takes students a little while to understand why the
LRAS curve is vertical, when the supply curves they learned in
their micro principles class were mostly upward-sloping.
Here’s an explanation you might find helpful:
“P” on the vertical axis is the economy’s overall price level –

75. the average price of EVERYTHING. A 10% increase in the
price level means that, on average, EVERYTHING costs 10%
more. Thus, a firm can get 10% more revenue for each unit it
sells. But the firm also pays an average of 10% more in wages,
prices of intermediate goods, advertising, and so on. Thus, the
firm has no incentive to increase output.
Another thought: We learn from microeconomics that a firm’s
supply depends on the RELATIVE price of its output. If all
prices increase by 10%, then each firm’s relative price is the
same as before, so firms have no incentive to alter output.
Long-run effects of an increase in M
Y
P
AD1
LRAS
An increase in M shifts AD to the right.
P1
P2
In the long run, this raises the price level…
…but leaves output the same.

76. AD2
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
20
[The textbook does a fall in AD (Figure 10-8 on p.289); this
slide does an increase.]
Notice that the results in this graph are exactly as we learned in
Chapter 5: a change in the money supply affects the price level,
but not the quantity of output. Here, we are seeing these results
on a graph with different variables on the axes (P and Y), but
it’s the same model.
Aggregate supply in the short run
Many prices are sticky in the short run.
For now (and through Chap. 12), we assume
all prices are stuck at a predetermined level in the short run.
firms are willing to sell as much at that price level as their
customers are willing to buy.
Therefore, the short-run aggregate supply (SRAS) curve is
horizontal:
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
21
The assumption that all prices are fixed in the short run is
extreme. Chapter 14 derives the SRAS curve under more
realistic assumptions.
Yet, the extreme assumption here is worth making.

77. The short-run response of output & employment to policies and
shocks is the same (qualitatively) whether the SRAS curve is
upward-sloping or horizontal. But the horizontal SRAS curve
makes the analysis much simpler: a shift in AD leaves P
unchanged in the short run. This greatly simplifies analysis in
the IS-LM-AD model (Chapters 11 and 12).
(With an upward-sloping SRAS curve, a shock to the IS and AD
curves would change prices in the short run in addition to
changing output. The change in prices would change the real
money supply, which would shift the LM curve.)
The short-run aggregate supply curve
Y
P
SRAS
The SRAS curve is horizontal:
The price level is fixed at a predetermined level, and firms sell
as much as buyers demand.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
22
Short-run effects of an increase in M
Y

78. P
AD1
In the short run when prices are sticky,…
…causes output to rise.
SRAS
Y2
Y1
AD2
…an increase in aggregate demand…
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
23
[The textbook (Figure 10-10 on p.291) does a decrease in AD,
this slide does an increase.]
What about the unemployment rate? Remember from chapter 2:
Okun’s law says that unemployment and output are negatively
related. In the graph here, in order for firms to increase output,
they require more workers. Employment rises, and the
unemployment rate falls.

79. From the short run to the long run
Over time, prices gradually become “unstuck.” When they do,
will they rise or fall?
rise
fall
remain constant
In the short-run equilibrium, if
then over time,
P will…
The adjustment of prices is what moves
the economy to its long-run equilibrium.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
24
The intuition for the price adjustment in each case:
First, suppose aggregate demand is higher than the full-
employment level of output in the economy’s initial short-run
equilibrium. Then, there is upward pressure on prices: In order
for firms to produce this above-average level of output, they
must pay their workers overtime and make their capital work at
a high intensity, which causes more maintenance, repairs, and
depreciation. For all these reasons, firms would like to raise
their prices. In the short run, they cannot. But over time,
prices gradually become “unstuck,” and firms can increase
prices in response to these cost pressures.
Instead, suppose that output is below its natural rate. Then,
there is downward pressure on prices: Firms can’t sell as much
output as they’d like at their current prices, so they would like

80. to reduce prices. With lower than normal output, firms won’t
need as many workers as normal, so they cut back on labor, and
the unemployment rate rises above the natural rate of
unemployment. The high unemployment rate puts downward
pressure on wages. Wages and prices are stuck in the short run,
but over time, they fall in response to these pressures.
Finally: if output equals its normal (or natural) level, then there
is no pressure for prices to rise or fall. Over time, as prices
become “unstuck,” they will simply remain constant.
The SR & LR effects of ΔM > 0
Y
P
AD1
LRAS
SRAS
P2
Y2
A = initial equilibrium
A
B
C
B = new short-run eq’m after Fed increases M
C = long-run equilibrium

81. AD2
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
25
[The textbook does a decrease in aggregate demand, Figure 10-
12 on p.292. This slide presents an increase in aggregate
demand.]
This slide puts together the pieces that have been developed
over the previous slides: the short-run and long-run effects, as
well as the adjustment of prices over time that causes the
economy to move from the short-run equilibrium at point B to
the long-run equilibrium at C.
The economy starts at point A; output and unemployment are at
their natural rates. The Fed increases the money supply,
shifting AD to the right. In the short run, prices are sticky, so
output rises. The new short-run equilibrium is at point B in the
graph.
In order for firms to increase output, they hire more workers, so
unemployment falls below the natural rate of unemployment,
putting upward pressure on wages. The high level of demand
for goods & services at point B puts upward pressure on prices.
Over time, as prices become unstuck, they begin to rise in
response to these pressures. The price level rises and the
economy moves up its (new) AD curve, from point B toward

82. point C.
This process stops when the economy gets to point C: output
again equals the natural rate of output, and unemployment again
equals the natural rate of unemployment, so there is no further
pressure on prices to change.
How shocking!!!
shocks: exogenous changes in agg. supply or demand
Shocks temporarily push the economy away from full
employment.
Example: exogenous decrease in velocity
If the money supply is held constant, a decrease in V
means people will be using their money in fewer transactions,
causing a decrease in demand for goods and services.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
26
[The example in the textbook is an exogenous INCREASE in
velocity.]
The exogenous decrease in velocity corresponds to an
exogenous increase in demand for real money balances (relative
to income & transactions). This might occur in response to a
wave of credit card fraud, which presumably would make
nervous consumers more inclined to use cash in their
transactions. If there’s an exogenous increase in real money
demand (i.e., an increase NOT caused by an increase in Y), then
M/P must increase as well; if the Fed holds M constant, then P
must fall. Thus, the increase in real money demand causes a
decrease in the value of P associated with each Y, and the AD
curve shifts down.
The velocity shock is the only AD shock we can analyze at this
point, because (for this chapter only) we have derived the AD

83. curve from the quantity theory of money.
In the following chapters, you will learn on a deeper level about
other AD shocks they may recall from their introductory course,
such as: a stock market crash causes consumers to cut back on
spending; a fall in business confidence causes a decrease in
investment; a recession in a country with which we trade causes
an exogenous decrease in their demand for our exports.
SRAS
LRAS
AD2
The effects of a negative demand shock
Y
P
AD1
P2
Y2
AD shifts left, depressing output and employment
in the short run.
A
B
C

84. Over time, prices fall and the economy moves down its demand
curve toward full employment.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
27
Note the economy’s self-correction mechanism:
When in a recession, the economy—left to its own devices—
fixes itself: the gradual adjustment of prices helps the economy
recover from the shock and return to full employment.
Of course, before the economy has finished self-correcting, a
period of low output and high unemployment is endured.
Supply shocks
A supply shock alters production costs, affects the prices that
firms charge. (also called price shocks)
Examples of adverse supply shocks:
Bad weather reduces crop yields, pushing up
food prices.
Workers unionize, negotiate wage increases.
New environmental regulations require firms to reduce
emissions. Firms charge higher prices to help cover the costs of
compliance.
Favorable supply shocks lower costs and prices.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
28
CASE STUDY:

85. The 1970s oil shocks
Early 1970s: OPEC coordinates a reduction in the supply of
oil.
Oil prices rose
11% in 1973
68% in 1974
16% in 1975
Such sharp oil price increases are supply shocks because they
significantly impact production costs and prices.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
29
Oil is required to heat the factories in which goods are
produced, and to fuel the trucks that transport the goods from
the factories to the warehouses to Walmart stores. A sharp
increase in the price of oil, therefore, has a substantial effect on
production costs.
SRAS1
Y
P
AD
LRAS
Y2

86. CASE STUDY:
The 1970s oil shocks
The oil price shock shifts SRAS up, causing output and
employment to fall.
A
B
In absence of
further price shocks, prices will fall over time and economy
moves back toward full employment.
SRAS2
A
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
30
And, as output falls from Ybar to Y2 in the graph, we would
expect to see unemployment increase above the natural rate of
unemployment. (Recall from chapter 2: Okun’s law says that
output and unemployment are inversely related.)
Note the phrase “in absence of further price shocks.” As we
will see shortly, just as the economy was recovering from the
first big oil shock, a second one came along.
CASE STUDY:
The 1970s oil shocks

87. Predicted effects
of the oil shock:
inflation #
output $
unemployment #
…and then a gradual recovery.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
31
This slide first summarizes the model’s predictions from the
preceding slide, and then presents data (from the text, p.299)
that supports the model’s predictions.
CASE STUDY:
The 1970s oil shocks
Late 1970s:
As economy
was recovering,
oil prices shot up again, causing another huge supply shock!
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
32
Data source: See p.299 of the textbook.
This second shock was associated with the revolution in Iran.
The Shah, who maintained cordial relations with the West, was
deposed. The new leader, Ayatollah Khomeini, was
considerably less friendly toward the West due to West’s

88. assistance to Israel to occupy Arab lands. Israel had a warm
relationship with Shah.
CASE STUDY:
The 1980s oil shocks
1980s:
A favorable supply shock—
a significant fall in oil prices.
As the model predicts,
inflation and unemployment fell.
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
33
A few slides back, we analyzed the effects of an adverse supply
shock. It might be worth noting that the predicted effects of a
favorable supply shock are just the opposite: in the short run,
the price level (or inflation rate) falls, output rises, and
unemployment falls.
Looking at the graph: at first glance, it may seem that the fall
in oil prices doesn’t occur until 1986. But look at the left-hand
scale, on which 0 is in the middle, not at the bottom. Oil prices
fell about 10% in 1982, and generally fell during most years
between 1982 and 1986.
Stabilization policy
def: policy actions aimed at reducing the severity of short-run
economic fluctuations.
Example: Using monetary policy to combat the effects of
adverse supply shocks…

89. ‹#›
CHAPTER 10 Introduction to Economic Fluctuations
34
Chapter 18 is devoted to stabilization policy.
Stabilizing output with
monetary policy
SRAS1
Y
P
AD1
B
A
Y2
LRAS
The adverse supply shock moves the economy to
point B.
SRAS2

90. ‹#›
CHAPTER 10 Introduction to Economic Fluctuations
35
Stabilizing output with
monetary policy
Y
P
AD1
B
A
C
Y2
LRAS
But the Fed accommodates the shock by raising agg. demand.
results:
P is permanently higher, but Y remains at its full-employment
level.

91. SRAS2
AD2
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
36
Note: If the Fed correctly anticipates the sign and magnitude of
the shock, then the Fed can respond as the shock occurs rather
than after, and the economy never would go to point B—it
would go immediately to point C.
CHAPTER SUMMARY
1. Long run: prices are flexible, output and employment are
always at their natural rates, and the classical theory applies.
Short run: prices are sticky, shocks can push output and
employment away from their natural rates.
2. Aggregate demand and supply:
a framework to analyze economic fluctuations
37
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
37
CHAPTER SUMMARY
3. The aggregate demand curve slopes downward.
4. The long-run aggregate supply curve is vertical, because
output depends on technology and factor supplies, but not
prices.

92. 5. The short-run aggregate supply curve is horizontal, because
prices are sticky at predetermined levels.
38
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
38
CHAPTER SUMMARY
6. Shocks to aggregate demand and supply cause fluctuations
in GDP and employment in the short run.
7. The Fed can attempt to stabilize the economy with
monetary policy.
39
‹#›
CHAPTER 10 Introduction to Economic Fluctuations
39
=-
32
Y
u
Y
D
D
,
=
()
YFKL
Y

93. Y
()
=
,
Y
FKL
P
YY
>
YY
<
YY
=
1
P
2
P
4%6%8%10%12%0%10%20%30%40%50%60%70%1973197419
7519761977Change in oil prices (left scale)Inflation rate-CPI
(right scale)Unemployment rate (right scale)
graph--all
years197319731973197419741974197519751975197619761976
19771977197719781978197819791979197919801980198019811
98119811982198219821983198319831984198419841985198519
85198619861986198719871987
Change in oil prices (left scale)
Inflation rate-CPI (right scale)
Unemployment rate (right scale)
0.11
0.062
0.049
0.68
0.11
0.056
0.16
0.091

94. 0.085
0.033
0.058
0.077
0.081
0.065
0.071
0.094
0.077
0.061
0.254
0.113
0.058
0.478
0.135
0.07
0.444
0.103
0.075
-0.087
0.061
0.095
-0.071
0.032
0.095
-0.017
0.043
0.074
-0.075
0.036
0.071
-0.445
0.019
0.069
0.183
0.036

95. 0.061
dataSource of data: pp.253-254 of Mankiw, Macroeconomics,
5th ed.d(OIL)dCPIu
rate197019711972197311.0%6.2%4.9%197468.0%11.0%5.6%19
7516.0%9.1%8.5%19763.3%5.8%7.7%19778.1%6.5%7.1%1978
9.4%7.7%6.1%197925.4%11.3%5.8%198047.8%13.5%7.0%198
144.4%10.3%7.5%1982-8.7%6.1%9.5%1983-
7.1%3.2%9.5%1984-1.7%4.3%7.4%1985-7.5%3.6%7.1%1986-
44.5%1.9%6.9%198718.3%3.6%6.1%
4%6%8%10%12%14%0%10%20%30%40%50%60%1977197819
7919801981
Change in oil prices (left scale)Inflation rate-CPI (right
scale)Unemployment rate (right scale)
graph--all
years197319731973197419741974197519751975197619761976
19771977197719781978197819791979197919801980198019811
98119811982198219821983198319831984198419841985198519
85198619861986198719871987
Change in oil prices (left scale)
Inflation rate-CPI (right scale)
Unemployment rate (right scale)
0.11
0.062
0.049
0.68
0.11
0.056
0.16
0.091
0.01
0.033
0.058
0.077
0.081
0.065
0.071

96. 0.094
0.077
0.061
0.254
0.113
0.058
0.478
0.135
0.07
0.444
0.103
0.075
-0.087
0.061
0.095
-0.071
0.032
0.095
-0.017
0.043
0.074
-0.075
0.036
0.071
-0.445
0.019
0.069
0.183
0.036
0.061
dataSource of data: pp.253-254 of Mankiw, Macroeconomics,
5th ed.d(OIL)dCPIu
rate197019711972197311%6.20%4.90%197468%11%5.60%197
516%9.10%1%19763.30%5.80%7.70%19778.10%6.50%7.10%1
9789.40%7.70%6.10%197925.40%11.30%5.80%198047.80%13.
50%7%198144.40%10.30%7.50%1982-8.70%6.10%9.50%1983-

97. 7.10%3.20%9.50%1984-1.70%4.30%7.40%1985-
7.50%3.60%7.10%1986-
44.50%1.90%6.90%198718.30%3.60%6.10%
0%2%4%6%8%10%-50%-40%-30%-20%-
10%0%10%20%30%40%198219831984198519861987
Change in oil prices (left scale)Inflation rate-CPI (right
scale)Unemployment rate (right scale)
graph--all
years197319731973197419741974197519751975197619761976
19771977197719781978197819791979197919801980198019811
98119811982198219821983198319831984198419841985198519
85198619861986198719871987
Change in oil prices (left scale)
Inflation rate-CPI (right scale)
Unemployment rate (right scale)
0.11
0.062
0.049
0.68
0.11
0.056
0.16
0.091
0.01
0.033
0.058
0.077
0.081
0.065
0.071
0.094
0.077
0.061
0.254
0.113
0.058

98. 0.478
0.135
0.07
0.444
0.103
0.075
-0.087
0.061
0.095
-0.071
0.032
0.095
-0.017
0.043
0.074
-0.075
0.036
0.071
-0.445
0.019
0.069
0.183
0.036
0.061
dataSource of data: pp.253-254 of Mankiw, Macroeconomics,
5th ed.d(OIL)dCPIu
rate197019711972197311%6.20%4.90%197468%11%5.60%197
516%9.10%1%19763.30%5.80%7.70%19778.10%6.50%7.10%1
9789.40%7.70%6.10%197925.40%11.30%5.80%198047.80%13.
50%7%198144.40%10.30%7.50%1982-8.70%6.10%9.50%1983-
7.10%3.20%9.50%1984-1.70%4.30%7.40%1985-
7.50%3.60%7.10%1986-
44.50%1.90%6.90%198718.30%3.60%6.10%
1
P

99. A"Model"of"Produc-on"
Econ"105A,"Intermediate"Macroeconomic"Theory!
!
Reading:!Chapter!4!(Charles!Jones)!
!
Tasneem"Raihan"
Department"of"Economics"
University"of"California,"Riverside"
Preliminaries
Review: The Model Approach
Facts Model Predictions
New facts to look for?
Consistent with the facts?
Production April 8, 2014
Preliminaries
The Production Model

100. Facts: some countries are rich, some countries are poor
Model: mathematical description of output production
I System of equations to be solved (supply and demand, e.g.)
I Same approach throughout this class
I This approach shared by both academia and industry
How well does the model explain the facts?
What might be wrong, and how can it be improved?
I Goal is constructive criticism
F How is the model unrealistic?
F How do assumptions a↵ ect predictions?
Production April 8, 2014
The Model Production Function
Cobb-Douglas Production Function
Production Function
Y = F(K, L) = AK1/3L2/3
L is labor (workers)
K is capital (machines, buildings, land)

101. A is the productivity parameter
I Follow Jones textbook notation
I Bar over the letter denotes fixed and exogenous parameter
Production April 8, 2014
The Model Production Function
Constant Returns to Scale
Y = F(K, L) = AK1/3L2/3
Suppose we double both inputs, labor (L) and capital (K):
F(2K, 2L) = A(2K)1/3(2L)2/3
= A21/3K1/322/3L2/3
= 2AK1/3L2/3 = 2F(K, L)
Double both inputs =) Double output
I Constant returns to scale
Standard replication argument
Production April 8, 2014
The Model Production Function

102. Constant Returns to Scale
Y = F(K, L) = AK1/3L2/3
Suppose we double both inputs, labor (L) and capital (K):
F(2K, 2L) = A(2K)1/3(2L)2/3
= A21/3K1/322/3L2/3
= 2AK1/3L2/3 = 2F(K, L)
Double both inputs =) Double output
I Constant returns to scale
Standard replication argument
Production April 8, 2014
The Model Production Function
Constant vs. Decreasing Returns to Scale
Y = F(K, L) = AK1/3L2/3
Suppose we double only one input, labor (L):
F(K, 2L) = AK1/3(2L)2/3
= A22/3K1/3L2/3
= 22/3AK1/3L2/3 = 22/3F(K, L) < 2F(K, L)

103. Same result if we double only capital (K)
I
F(2K, L) = 21/3F(K, L) < 2F(K, L)
Constant returns to scale in K and L together
Decreasing returns to scale in both K and L alone
Production April 8, 2014
The Model Production Function
Diminishing Marginal Products
Y = F(K, L) = AK1/3L2/3
Decreasing returns in K and L =) diminishing marginal products
Marginal product of capital (MPK):
MPK =
@Y
@K
=
1
3
AK
�2/3
L

104. 2/3
=
1
3
A
✓
L
K
◆
2/3
=
1
3
AK
1/3
L
2/3
K
=
1
3
·

105. Y
K
MPK is decreasing in capital (K)
Production April 8, 2014
The Model Production Function
Diminishing Marginal Products
Y = F(K, L) = AK1/3L2/3
Decreasing returns in K and L =) diminishing marginal products
Marginal product of labor (MPL):
MPL =
@Y
@L
=
2
3
AK
1/3
L
�1/3

106. =
2
3
A
✓
K
L
◆
1/3
=
2
3
AK
1/3
L
2/3
L
=
2
3
·
Y
L

107. MPL is decreasing in labor (L)
Production April 8, 2014
The Model Production Function
Diminishing Marginal Products
Production April 8, 2014
The Model Solving the Model
The Production Model So Far
Production function: Y = AK1/3L2/3
One equation (production function)
One exogenous variable (productivity parameter A)
Three endogenous variables: Y , K, L
I Need two more equations, more exogenous variables
Production April 8, 2014
The Model Solving the Model
Completing the Model

108. Capital market supply equals demand: K = K
I Exogenous supply of capital K
Labor market supply equals demand: L = L
I Exogenous supply of labor L
Three equations, three unknown endogenous variables
Y = AK1/3L2/3
K = K
L = L
Production April 8, 2014
The Model Solving the Model
Equilibrium of the Production Model
Equilibrium
The equilibrium quantities of output, labor, and capital in the
production
model are given by
Y
⇤ = A K
1/3

109. L
2/3
K
⇤ = K
L
⇤ = L
Star above letter denotes an equilibrium value
Express endogenous variables as functions of exogenous
variables
Key equation is Y ⇤ = A K
1/3
L
2/3
Production April 8, 2014
The Model Factor Shares
Predictions of the Production Model
Y
⇤ = A K

110. 1/3
L
2/3
Key prediction:
more machines or more people =) more production, more output
Any predictions about where output goes?
I Capital vs. labor
I Need to determine the equilibrium wage rate w
I Need to determine the equilibrium rental rate of capital r
Production April 8, 2014
The Model Factor Shares
Marginal Products and Wages
Perfect competition =)
(
w = MPL
r = MPK
Why?
I If MPL > w, firms want to hire more labor

111. I
MPL = 2
3
· Y
L
is decreasing in L, so L " =) MPL #
I If MPK > r, firms want to hire more capital
I
MPK = 1
3
· Y
K
is decreasing in K, so K " =) MPK #
Production April 8, 2014
The Model Factor Shares
Equilibrium Factor Shares
MPL =
2
3
·

112. Y
⇤
L
⇤ and MPK =
1
3
·
Y
⇤
K
⇤
Total labor income equals w⇤L⇤ = L⇤ · MPL = 2
3
Y
⇤
I It follows that w
⇤
L
⇤
Y
⇤ =
2

113. 3
Total capital income equals r⇤K⇤ = K⇤ · MPK = 1
3
Y
⇤
I It follows that r
⇤
K
⇤
Y
⇤ =
1
3
Model predicts that labor gets 2/3 of income while capital gets
1/3
I Consistent with the data?
Production April 8, 2014
The Model Factor Shares
Factor Shares over Time

114. Production April 8, 2014
Production Model Predictions
Output per Person
Production model:
Y
⇤ = A K
1/3
L
2/3
Key prediction:
more machines or more people =) more production, more output
What about output per person (GDP per capita)?
I Better measure of country welfare
I Need to solve model for output per person
Production April 8, 2014
Production Model Predictions
From Output to Output per Person

115. y = Y
L
is output per person
k = K
L
is capital per person
Recall that Y ⇤ = A K
1/3
L
2/3
and L⇤ = L
Output per person:
y
⇤ =
Y
⇤
L
⇤ =
A K
1/3
L

116. 2/3
L
= A
✓
K
L
◆
1/3
= A k
1/3
Production April 8, 2014
Production Model Predictions
From Output to Output per Person
y = Y
L
is output per person
k = K
L
is capital per person
Recall that Y ⇤ = A K

117. 1/3
L
2/3
and L⇤ = L
Output per person:
y
⇤ =
Y
⇤
L
⇤ =
A K
1/3
L
2/3
L
= A
✓
K
L
◆

118. 1/3
= A k
1/3
Production April 8, 2014
Production Model Predictions
Two Predictions
y
⇤ = A k
1/3
1 More capital per person =) higher GDP per capita
2 Higher productivity parameter =) higher GDP per capita
Facts Model Predictions
New facts to look for?
Consistent with the facts?
Production April 8, 2014
Production Model Predictions
How Do We Test the Production Model?

119. Equilibrium
The equilibrium quantity of GDP per capita in the production
model is
given by
y
⇤ = A k
1/3
Equal productivity across countries =) A same for all countries
A = 1 =) y⇤ = k1/3
Simple prediction about GDP per capita vs. capital per capita
I Data on GDP and capital per capita across countries
Production April 8, 2014
Production Model Predictions
How Do We Test the Production Model?
Equilibrium
The equilibrium quantity of GDP per capita in the production
model is
given by
y

120. ⇤ = A k
1/3
Equal productivity across countries =) A same for all countries
A = 1 =) y⇤ = k1/3
Simple prediction about GDP per capita vs. capital per capita
I Data on GDP and capital per capita across countries
Production April 8, 2014
Empirical Fit of the Production Model
A Look at the Data
Model Prediction: y⇤ = k
1/3
Country Observed capital Observed GDP Predicted GDP
per capita per capita per capita
Untied States 1.000 1.000 1.000
Turkey 0.290 0.221 0.662
Argentina 0.247 0.292 0.628
Nigeria 0.015 0.072 0.245
Thailand 0.209 0.162 0.593

121. Netherlands 0.747 0.916 0.908
Japan 1.173 0.713 1.055
Production April 8, 2014
Empirical Fit of the Production Model
A Look at the Data
Production April 8, 2014
Empirical Fit of the Production Model
Consistent with the Facts?
Higher capital per person =) higher GDP per person
I Data and model match decently well
Model tends to overestimate GDP per person
Change production function so that y⇤ = k
x
, with x > 1/3?
I Helps with overestimation for poor countries
I Contradicts factor shares data

122. I Model still overestimates GDP for rich countries
Allow A to vary across countries?
I
y
⇤ = A k
1/3
Production April 8, 2014
Empirical Fit of the Production Model
Total Factor Productivity
Production function: Y = F(K, L) = AK1/3L2/3
Higher value of A =) higher GDP for any values of K and L
I Measures how e�ciently inputs K and L are used to produce
output
I Captures many di↵ erent real-world circumstances
I Virtually impossible to measure directly
A is often called total factor productivity (TFP)
Production April 8, 2014
Empirical Fit of the Production Model

123. Varying TFP
Can’t measure A directly
Can measure y⇤ and k⇤ directly
)
=)
Calculate value of A that
validates model
Equilibrium GDP per capita: y⇤ = A k
1/3
Assume production model is correct
Plug in observed values of y⇤ and k, and solve for A
Production April 8, 2014
Empirical Fit of the Production Model
Examples: y⇤ = A k
1/3
Spain:
I
y
⇤ = 0.733, k = 0.908

124. I Predicted y⇤ = k
1/3
= 0.968
I Implied value of TFP A = 0.757
Spain combines inputs about 3/4 as e�ciently as U.S.
China:
I
y
⇤ = 0.183, k = 0.127
I Predicted y⇤ = k
1/3
= 0.502
I Implied value of TFP A = 0.365
China combines inputs about 1/3 as e�ciently as U.S.
Production April 8, 2014
Empirical Fit of the Production Model
Diminishing Marginal Products and TFP Di↵ erences
Production April 8, 2014

125. Empirical Fit of the Production Model
Implied TFP Across Many Countries
Production April 8, 2014
Empirical Fit of the Production Model
Capital Stock vs. TFP
How important are TFP di↵ erences in explaining rich vs. poor?
How important are capital stock di↵ erences?
Consider five richest and five poorest countries:
y
⇤
rich
y
⇤
poor
=
A
rich
A

126. poor
✓
k
rich
k
poor
◆
1/3
66 = 11 ⇥ 6
=) TFP almost twice as important as capital stock
What exactly is TFP?
Production April 8, 2014
Discussion of Total Factor Productivity
TFP Overview
Assigning two-thirds of rich-poor income gap to TFP is
unsatisfying
I Residual, captures everything else that a↵ ects output
I Measure of our ignorance

127. I Very di�cult to measure directly
I How is TFP increased? Can certain policies help?
How quickly and abruptly can TFP change?
I Russia post-reforms
Production April 8, 2014
Discussion of Total Factor Productivity
Collapse of TFP in Russia
Production April 8, 2014
Discussion of Total Factor Productivity
Human Capital
Human capital is the stock of workers’ skills
I More skills =) workers more productive
How do workers acquire skills?
I Education: literacy, high school, university
I Experience: learning to operate equipment, new techniques
Big di↵ erences in education and hence human capital across
countries