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Unit 6: The Business Cycle Society's Goals for Macro System Growth Stable Prices & Money Full Employment Stability of Business Cycle A “Recession” is a ‘period of prolonged, widespread decline in economic activity’formal definition. U.S. business cycle history before Great Depression. http://static.safehaven.com/authors/alexander/110602_b.gif U.S. business cycle history Great Depression through 1998. http://www.socialstudieshelp.com/Images/Business_Levels.jpg The “Business Cycle” is based on ups and downs of real GDP growth. Common to capitalist market economies http://www.nber.org/cycles.html Components of Business Cycles Two phases Expansion “Recovery” Contraction “Recession” Points: Peak Trough The down phase of a cycle is Contraction or Recession. The growth phase of a cycle is Expansion. recovery There are 2 key points in a cycle: peaks and troughs. Policy Goal: Cyclical Stability with recessions that are mild, short, and infrequent. ‘Depression’ is a very severe or longlasting contraction, but has no formal, technical definition. Depressions often result from a financial ‘panic’ or financial/banking system crisis Slow growth (slower than population) sometimes called ‘growth recession’ or ‘stagnation’ Why Theory Matters – History and Evolution of Theories Inflation vs. unemployment – the apparent balancing act Cyclical Policy Tradeoffs: Inflation vs. Employment Evolution of Macro Economic Theories Diagram of evolution of Macro theories ideological foundations of stable/laissez faire – stable with policy – unstable w/ policy – unstable