Worth: Mankiw Economics 5e HAPTER 9 Introduction to Economic Fluctuations 239 Real GDP growth rate Average growth rate 1960 1970 1975 1980 1985 1995 2000 Real GDP Growth in the United States Growth in real GDP averages about 3. 5 percent per year, as indicated by the orange line, but there are substantial fluctuations around this average Recessions are periods when the production of goods and services is declining, represented here by negative growth in real GDP Source: U.S. Department of Commerce. and aggregate demand. With this model we can show how shocks to the econ- omy lead to short-run fuctuations in output and employment Just as egypt now controls the flooding of the Nile valley with the Aswan Dam, modern society tries to control the business cycle with appropriate eco- nomic policies. The model we develop over the next several chapters shows how monetary and fiscal policies infuence the business cycle. We will see that these policies can potentially stabilize the economy or, if poorly conducted, make the problem of economic instability even w 9-1 Time Horizons in macroeconomics Before we start building a model of short-run economic fluctuations, let's step back and ask a fundamental question: Why do economists need different models or different time horizons? Why can, t we stop the course here and be content with the classical models developed in Chapters 3 through 8? The answer, as this book has consistently reminded its reader, is that classical macroeconomic theory applies to the long run but not to the short run. But why is this so? User JOENA: Job EFFo1425: 6264_ch09: Pg 239: 27131#eps at 100*gl wed,Feb13,200210:074User JOEWA:Job EFF01425:6264_ch09:Pg 239:27131#/eps at 100% *27131* Wed, Feb 13, 2002 10:07 AM and aggregate demand.With this model we can show how shocks to the econ￾omy lead to short-run fluctuations in output and employment. Just as Egypt now controls the flooding of the Nile Valley with the Aswan Dam, modern society tries to control the business cycle with appropriate eco￾nomic policies.The model we develop over the next several chapters shows how monetary and fiscal policies influence the business cycle.We will see that these policies can potentially stabilize the economy or, if poorly conducted, make the problem of economic instability even worse. 9-1 Time Horizons in Macroeconomics Before we start building a model of short-run economic fluctuations, let’s step back and ask a fundamental question:Why do economists need different models for different time horizons? Why can’t we stop the course here and be content with the classical models developed in Chapters 3 through 8? The answer, as this book has consistently reminded its reader, is that classical macroeconomic theory applies to the long run but not to the short run. But why is this so? CHAPTER 9 Introduction to Economic Fluctuations | 239 figure 9-1 Percentage change from 4 quarters earlier 10 8 6 4 2 0
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4 1960 1965 Year 1970 1975 1980 1985 1990 1995 2000 Real GDP growth rate Average growth rate Real GDP Growth in the United States Growth in real GDP averages about 3.5 percent per year, as indicated by the orange line, but there are substantial fluctuations around this average. Recessions are periods when the production of goods and services is declining, represented here by negative growth in real GDP. Source: U.S. Department of Commerce