Worth: Mankiw Economics 5e CHAPTER NINE Introduction to Economic fluctuations The modern world regards business cycles much as the ancient egyptian regarded the overflowing of the Nile. The phenomenon recurs at intervals, it is of great importance to everyone, and natural causes of it are not in sight John Bates Clark, 1898 Economic fluctuations present a recurring problem for economists and policy makers. This problem is illustrated in Figure 9-1, which shows growth in real GDP for the U.S. economy. As you can see, although the economy experiences long-run growth that averages about 3.5 percent per year, this growth is not at all steady. Recessions--periods of falling incomes and rising unemployment-are frequent. In the recession of 1990, for instance, real GDP fell 2.2 percent from its peak to its trough, and the unemployment rate rose to 7.7 percent. During reces- sions, not only are more people unemployed, but those who are employed have shorter workweeks, as more workers have to accept part-time jobs and fewer workers have the opportunity to work overtime. When recessions end and the economy enters a boom, these effects work in reverse: incomes rise, unemploy ment falls, and workweeks expand Economists call these short-run fluctuations in output and employment the business cycle. Although this term suggests that economic fluctuations are regular and predictable, they are not. Recessions are as irregular as they are common. Sometimes they are close together, such as the recessions of 1980 and 1982. Sometimes they are far apart, such as the recessions of 1982 and 1990 In Parts II and Ill of this book, we developed theories to explain how the economy behaves in the long run. Those theories were based on the classical dichotomy-the premise that real variables, such as output and employment,are not affected by what happens to nominal variables, such as the money supply and the price level. Although classical theories are useful for explaining long-run trends, including the economic growth we observe from decade to decade, most economists believe that the classical dichotomy does not hold in the short run d, therefore, that classical theories cannot explain year-to-year fluctuations output and employment. Here, in Part IV, we see how economists explain these short-run fluctuation This chapter begins our analysis by discussing the key differences between the long run and the short run and by introducing the model of aggregate supply 238 User JOENA: Job EFFo1425: 6264_ch09: Pg 238: 27130#/eps at 100*mg wea,Feb13,200210:07AMUser JOEWA:Job EFF01425:6264_ch09:Pg 238:27130#/eps at 100% *27130* Wed, Feb 13, 2002 10:07 AM Economic fluctuations present a recurring problem for economists and policy￾makers. This problem is illustrated in Figure 9-1, which shows growth in real GDP for the U.S. economy. As you can see, although the economy experiences long-run growth that averages about 3.5 percent per year, this growth is not at all steady. Recessions—periods of falling incomes and rising unemployment—are frequent. In the recession of 1990, for instance, real GDP fell 2.2 percent from its peak to its trough, and the unemployment rate rose to 7.7 percent. During reces￾sions, not only are more people unemployed, but those who are employed have shorter workweeks, as more workers have to accept part-time jobs and fewer workers have the opportunity to work overtime.When recessions end and the economy enters a boom, these effects work in reverse: incomes rise, unemploy￾ment falls, and workweeks expand. Economists call these short-run fluctuations in output and employment the business cycle. Although this term suggests that economic fluctuations are regular and predictable, they are not. Recessions are as irregular as they are common. Sometimes they are close together, such as the recessions of 1980 and 1982. Sometimes they are far apart, such as the recessions of 1982 and 1990. In Parts II and III of this book, we developed theories to explain how the economy behaves in the long run. Those theories were based on the classical dichotomy—the premise that real variables, such as output and employment, are not affected by what happens to nominal variables, such as the money supply and the price level. Although classical theories are useful for explaining long-run trends, including the economic growth we observe from decade to decade, most economists believe that the classical dichotomy does not hold in the short run and, therefore, that classical theories cannot explain year-to-year fluctuations in output and employment. Here, in Part IV, we see how economists explain these short-run fluctuations. This chapter begins our analysis by discussing the key differences between the long run and the short run and by introducing the model of aggregate supply Introduction to Economic Fluctuations 9 CHAPTER The modern world regards business cycles much as the ancient Egyptians regarded the overflowing of the Nile.The phenomenon recurs at intervals, it is of great importance to everyone, and natural causes of it are not in sight. — John Bates Clark, 1898 NINE 238 |