ECON102 Chapter Notes - Chapter 28: Real Business-Cycle Theory, Real Interest Rate, Aggregate Demand
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2 Dec 2017
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Mainstream business cycle theory: potential gdp grows at a steady rate while aggregate demand grows at a fluctuating rate. If aggregate demand grows faster than potential gdp, real gdp moves above potential gdp and there is an inflationary gap. If technological makes a sufficient amount of existing capital obsolete, productivity can temporarily fall: the rbc mechanism, during a recession, technological change makes some existing capital obsolete and temporarily decreases productivity. Firms expect future profits to fall and see their labour productivity falling: cut back on purchases of new capital and plan to lay off workers. If quantity of money changes, aggregate demand changes: with no changes in the use of resources or real gdp, the changes in the quantity of money only changes the price level. Criticisms and defences of rbc theory: the money wage is sticky, and to assume otherwise is at odds with a clear fact.
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