Marcro micro econmiy david begg chapter 031

Chapter 31 The business cycle David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith The business cycle: short-term fluctuations of total output around its trend path Output Trend output grows steadily as productive potential increases Actual output fluctuates around this trend Actual output A – slump C E D Trend output B – recovery phase has begun C – Boom A B D – recession under way Time E – slump again 31.2 UK: growth of real GDP % change p.a -2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 -4 Source: Economic Trends Annual Supplement 31.3 The political business cycle Some commentators have suggested that there is a political business cycle ■ whereby governments adopt tight monetary and fiscal policy soon after an election ■ but then adopt more expansionary policies as the election approaches to encourage a ‘feel-good’ factor ■ 31.4 Theories of the business cycle ■ The multiplier-accelerator theory: – – ■ the multiplier communicates the effects of changing investment to aggregate demand the accelerator assumes that firms gauge future demand by reference to past output growth this model can produce fluctuations in output level in response to a shock 31.5 Fluctuations in stock-building Stockbuilding may also be a cause of fluctuations in output ■ Firms tend to use stocks to smooth production in the face of fluctuating demand ■ Output per worker tends to rise in times of boom, and fall in times of recession ■ 31.6 Real business cycles ■ In this view of the world, fluctuations in actual output are fluctuations in potential output ■ … so there is no point in trying to stabilize output over the business cycle ■ Although some swings in potential output occur, many short-run fluctuations are more likely to reflect Keynesian departures from potential output 31.7 % p.a Is there an international business cycle? Growth in GDP, selected countries 16 14 12 10 -2 -4 USA UK France Italy Source: International Financial Statistics 31.8