ECON 2000 Lecture Notes - Lecture 4: Business Cycle, Imperfect Competition, Real Wages
28 Nov 2016
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Document Summary
Production in the long run is determined by: productive resources (k,l, ability to transform those resources into output. Potential gdp is the level of production when the economy performs at full capacity given its efficiency. Capacity means using k,l to their fullest extent. Sometimes actual rgdp can be higher than pgdp and sometimes it is lower. Business cycle: the fluctuation of rgdp around pgdp. Each cycle has two phases: expansionary - when y increases, contractionary - when y decreases. Each phase has 2 turning points - peak and trough. We need to know: what causes business cycle, how to explain it, what to do to control it, should we control it. Shock is an exogenous event affecting the economy. Suppose price (p) went down (an exogenous shock) (w/p) goes up for a given nominal wage. Real wage should adjust by lowering the nominal wage. Nominal wage must go down to bring the market back to equilibrium.
