ECON 102 Lecture Notes - Lecture 10: Output Gap, Business Cycle
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Econ 102 lecture 10 from short run to long run con"t: contractionary ad shocks. Assume productivity constant, thus as w decreases, ac decreases. 1: #1 ad shock: e. g. decrease autonomous i, ad shifts left, recessionary gap: y1 - y* <0, adjust: wages fall costs fall sras shifts right (chain) Initially, assume in eq y = y*: (y*, p1) (anchor) Economy languishes in recession: both inflationary and recessionary gaps disappear. 2. automatically but slowly compared to discretionary fiscal policy. Inflationary gap disappears more quickly than the recessionary gap (asymmetry: recessionary gap disappears more quickly when wages are flexible, as shocks. Note: redistribution of income from workers to shareholders: lr equilibrium. Shocks and the business cycle: business cycle = change in y over time due to random shocks, positive ad or as shock: = y is no longer adjusting to output gaps. Lras = relationship between p and y after all input costs have adjusted to eliminate input shortages or u.