2 CHAPTER 9 Introduction to Economic Fluctuations 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.

7 CHAPTER 9 Introduction to Economic Fluctuations 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.

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10 CHAPTER 9 Introduction to Economic Fluctuations Time horizons in macroeconomics  Long run Prices are flexible, respond to changes in supply or demand.  Short run Many prices are “sticky” at a predetermined level. The economy behaves much differently when prices are sticky.