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Chp. 8: Business Cycles

Chp. 8: Business Cycles. Focus: What is business cycle? Characteristics of Business Cycles Stylized facts about business cycles. Business cycle refers to fluctuations in aggregate economic activity. Characteristics of Business Cycle: Recurrent but not periodic Persistent

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Chp. 8: Business Cycles

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  1. Chp. 8: Business Cycles Focus: • What is business cycle? • Characteristics of Business Cycles • Stylized facts about business cycles

  2. Business cycle refers to fluctuations in aggregate economic activity. Characteristics of Business Cycle: • Recurrent but not periodic • Persistent • Co-movement: A number of variables move together.

  3. Variables which move in the same direction as the aggregate economic activity are called procyclical. Example- Industrial Production, Consumption, Investment, Trade Balance, Employment, Average Labor Productivity Inflation, Nominal Interest Rate • Variables which move in the opposite direction to the aggregate economic activity are called countercyclical. Example- Unemployment Rate • Variables which do not show any pattern over business cycle are called acyclical. Example- Real Wage, Real Interest Rate

  4. Variables which move in advance of aggregate economic activity are called leading variables. Example – Inventory Investment, Trade Balance, Money Growth, Average Labor Productivity, Stock Prices • Variables which move after the aggregate economic activity are called lagging variables. Example – Inflation, Nominal Interest Rate • Variables which move at the same time as the aggregate variables are called coincident variables. Example – Consumption, Unemployment, Employment

  5. AD-AS Model • AD (Aggregate Demand) curve relates price level (P) to aggregate demand. It is downward sloping. • AS (Aggregate Supply) curve relates price level (P) to aggregate supply. • Long Run AS curve is vertical at full employment level of output. • Short Run AS curve is horizontal implying that in the short-run price is fixed (Keynesian notion).

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