Lecture 14 - Introduction to economic fluctuations. The main contents of the chapter consist of the following: difference between short run & long run, introduction to aggregate demand, aggregate supply in the short run & long run. | Review of the previous lecture Exchange rates nominal: the price of a country’s currency in terms of another country’s currency real: the price of a country’s goods in terms of another country’s goods. The real exchange rate equals the nominal rate times the ratio of prices of the two countries. How the real exchange rate is determined NX depends negatively on the real exchange rate, other things equal The real exchange rate adjusts to equate NX with net capital outflow How the nominal exchange rate is determined e equals the real exchange rate times the country’s price level relative to the foreign price level. For a given value of the real exchange rate, the percentage change in the nominal exchange rate equals the difference between the foreign & domestic inflation rates. Lecture 14 Introduction to Economic Fluctuations Instructor: Prof. Dr. Qaisar Abbas Lecture Contents difference between short run & long run introduction to aggregate demand aggregate supply in the short run & . | Review of the previous lecture Exchange rates nominal: the price of a country’s currency in terms of another country’s currency real: the price of a country’s goods in terms of another country’s goods. The real exchange rate equals the nominal rate times the ratio of prices of the two countries. How the real exchange rate is determined NX depends negatively on the real exchange rate, other things equal The real exchange rate adjusts to equate NX with net capital outflow How the nominal exchange rate is determined e equals the real exchange rate times the country’s price level relative to the foreign price level. For a given value of the real exchange rate, the percentage change in the nominal exchange rate equals the difference between the foreign & domestic inflation rates. Lecture 14 Introduction to Economic Fluctuations Instructor: Prof. Dr. Qaisar Abbas Lecture Contents difference between short run & long run introduction to aggregate demand aggregate supply in the short run & long run 2 Real GDP Growth in the United States Average growth rate = 3 Point out the recessions, where GDP growth is negative for two or more quarters. 1974:2 through 1975:2 1980:2 through 1980:4 1982:1 through 1982:4 1991:1 through 1991:3 Source: Department of Commerce, Bureau of Economic Analysis: Growth rate of real GDP (chained 1996 dollars) Note: Recession dates may not precisely match official NBER recession dates, but data here do match that used in the text. Time horizons Long run: Prices are flexible, respond to changes in supply or demand Short run: many prices are “sticky” at some predetermined level The economy behaves much differently when prices are sticky. 4 In Classical Macroeconomic Theory, Output is determined by the supply side: supplies of capital, labor technology Changes in demand for goods & services (C, I, G ) only affect prices, not quantities. Complete price flexibility is a crucial assumption, so classical theory applies in the long run. 5 Classical .
