Ten Principles of Economics - Part 69. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 31 AGGREGATE DEMAND AND AGGREGATE SUPPLY 705 FACT 3 AS OUTPUT FALLS UNEMPLOYMENT RISES Changes in the economy s output of goods and services are strongly correlated with changes in the economy s utilization of its labor force. In other words when real GDP declines the rate of unemployment rises. This fact is hardly surprising When firms choose to produce a smaller quantity of goods and services they lay off workers expanding the pool of unemployed. Panel c of Figure 31-1 shows the unemployment rate in the . economy since 1965. Once again recessions are shown as the shaded areas in the figure. The figure shows clearly the impact of recessions on unemployment. In each of the recessions the unemployment rate rises substantially. When the recession ends and real GDP starts to expand the unemployment rate gradually declines. The unemployment rate never approaches zero instead it fluctuates around its natural rate of about 5 percent. QUICK QUIZ List and discuss three key facts about economic fluctuations. EXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS Describing the regular patterns that economies experience as they fluctuate over time is easy. Explaining what causes these fluctuations is more difficult. Indeed compared to the topics we have studied in previous chapters the theory of economic fluctuations remains controversial. In this and the next two chapters we develop the model that most economists use to explain short-run fluctuations in economic activity. HOW THE SHORT RUN DIFFERS FROM THE LONG RUN In previous chapters we developed theories to explain what determines most important macroeconomic variables in the long run. Chapter 24 explained the level and growth of productivity and real GDP. Chapter 25 explained how the real interest rate adjusts to balance saving and investment. Chapter 26 explained why there is always some unemployment in the economy. Chapters 27 and 28 explained the monetary system and how changes in the money supply affect the price .
