ECON 2 Lecture Notes - Lecture 33: Stock Market Crash, Marginal Revenue, Aggregate Demand
Chapter 33: Macroeconomics Fluctuations
Two different Quantities:
1. Fluctuations
2. Trends
Economic fluctuations are variations around a trend
Note: Volatility describes variance of data with the trend removes, or variance around a trend;
measure of the size of fluctuations
Fact 1: Economic Fluctuations are Irregular and Unpredictable
The Business Cycle is the fluctuation of economic variables
• Cycle has booms and busts
• Though cyclical, booms and busts do not come at regular intervals
Fact 2: Most macroeconomic Quantities Fluctuate Together
Macro Quantities = Aggregate (Added together) quantities that compare Y, C, I
**Total personal income, total profits, total consumer spending, total investment spending, total
industrial production, total retail sales, total home sales, total auto sales, etc.
• Although they fluctuate together, the size of fluctuations is different
• Investment spending varies most of the spending variables C, I, G (as percent of their own
respective values)
• NX also varies greatly (as percent) in recent years
Fact 3: unemployment rises as GDP falls
• During recession, the unemployment rate rises a lot!
Classical theory says money does not matter; approx. true in the long run
• Inflation variation does matter in the short run
• We will model aggregate demand (AD) and aggregate supply (AS) as fxns of price level
o E.g. price of basket of goods
The Aggregate-Demand Curve
• AD Y measures total real spending (or demand) for all goods in an economy as a fxn of the price
level P
• P is price for a basket of goods in economy (e.g. CPI)
• For simplicity, assume G doesn't depend on P
• Y(P) = C(P) + I(P) + G + NX(P)
o Will argue why each of components are decreasing in P and therefore Y(P) is decreasing in P
(like true demand)
1. Wealth Effect --
o As price level P falls, consumers have more money left over after having purchased their
normal basket of goods
o They are "wealthier" in short run --> will buy a little more
▪ Consumption increase as P falls!
2. Interest Rate Effect --
o As consumer goods cheaper, consumers buy more goods and save more
o Savings increases, interest rate falls
o Increases the equilibrium quantity invested
3. Exchange Rate Effect --
Document Summary
Note: volatility describes variance of data with the trend removes, or variance around a trend; measure of the size of fluctuations. Fact 1: economic fluctuations are irregular and unpredictable. The business cycle is the fluctuation of economic variables: cycle has booms and busts, though cyclical, booms and busts do not come at regular intervals. Macro quantities = aggregate (added together) quantities that compare y, c, i. **total personal income, total profits, total consumer spending, total investment spending, total industrial production, total retail sales, total home sales, total auto sales, etc: although they fluctuate together, the size of fluctuations is different. Investment spending varies most of the spending variables c, i, g (as percent of their own respective values: nx also varies greatly (as percent) in recent years. Fact 3: unemployment rises as gdp falls: during recession, the unemployment rate rises a lot! Classical theory says money does not matter; approx. true in the long run.
