曼昆第10版讲义mankiw10e-irm-ch10

|CHAPTER10 IntroductiontoEconomicFluctuations

LectureNotes|

CHAPTER10

IntroductiontoEconomicFluctuations

NotestotheInstructor

ChapterSummary

Thischapterintroducesstudentstoshort-runeconomicfluctuations,theimportanceofstickyprices,andtheaggregatedemand–aggregatesupplymodel.Themainaimsofthechapterarethefollowing:

1. Toemphasizethatpricesareflexibleinthelongrunbutmaybestickyintheshortrunandtoshowthatstickypricesplayanimportantroleinmodelsofeconomicfluctuations.

2. Tointroduceasimplequantity-equationaggregatedemandcurve(priortothemoregeneralIS–LMtheoryofaggregatedemandthatispresentedinChapters11and12).

3. Todistinguishbetweenthelong-andshort-runaggregatesupplycurves.

4. Tointroducetheideaofshockstoaggregatedemandandaggregatesupplyasasourceofeconomicfluctuations.

Comments

ThisisobviouslyagoodpointatwhichtoreviewthemodelsofthelongrunpresentedinPartIIofthetextbookandtoexplainwhythesearenotadequateforunderstandingtheshort-runbehavioroftheeconomy.(Supplement10-8maybehelpfulforthis.)PartIVofthebookwillpresentthestudentswithmanynewmodelsatafastrate,soitisimportantthattheyhaveagoodgraspofthelong-runmodelsofPartII.Italsoishelpfultoemphasizethatshort-runmodelsareasupplement,notanalternative,tolong-runmodels.Allthetimethatstudentsarestudyingtheshortrun,theyshouldtrytoretainthelong-runmodelsatthebackoftheirminds,andIoftenreferbacktothelong-runmodelswhenteachingthematerialontheshortrun.

Chapter10isalsoanaturaltimetointroducestudentstothestylizedfactsofthebusinesscycleinmoredetail.Italsoprovidesanopportunitytosuggestthatfluctuationsmaybecostly,todiscusswhythismightbeso,andtointroducetheideaofstabilizationpolicy(whichisconsideredinmoredetailinChapter12).Imaketheargumentforfluctuationsbeingcostlylargelyintermsofvariabilityinoutputandemploymentandpointoutthatpolicycanhelpdampenthisvariability.

UseoftheWebsite

Sincethisisthepointinthecourseatwhichbusinesscyclescometotheforefront,itisanaturaltimetomakemuchuseofthedataplotter.TheplottercanbeusedinparticulartoshowtheirregularfluctuationsinGDPthathavetobeexplainedandalsotodemonstrateotherbasicstylizedfacts.

UseoftheEWebsite

UsetheEwebsitetodownloadannualdataforU.S.realGDPgrowth,theU.S.GDPpriceindex,andthepriceofoilperbarrel.ComputetherealpriceofoilbydeflatingitwiththeGDPpriceindex.GraphrealGDPgrowthagainsttherealpriceofoil.Assesstheextenttowhichoilpriceshocksappeartohaveinfluencedrealgrowth.

ChapterSupplements

Thischapterincludesthefollowingsupplements:

10-1 TheDatingofBusinessCycles

10-2 UnderstandingBusinessCyclesI:TheStylizedFacts

10-3 ArePricesSticky?I:EvidencefromIndividualTransactions(CaseStudy)

10-4 ArePricesSticky?II:Mail-OrderEvidence(CaseStudy)

10-5 DavidHumeontheRealEffectsofMoney

10-6 PriceStickinessandParetoEfficiency

10-7 Velocityandthe1982Recession

10-8 UnderstandingBusinessCyclesII:ModelingCycles

10-9 TheEconomyintheLongRunandVeryLongRun:SummaryofPartsIIandIIIandIntroductiontoPartIV

10-10 TheCostofBusinessCycles

10-11 AdditionalReadings

LectureNotes

Introduction

Supplement10-1,“TheDatingofBusinessCycles”

TheclassicalmodeldevelopedinPartIIofthebookexplainsthebehaviorofkeymacroeconomicvariablesinthelongrun.Butthetaskofmacroeconomicsgoesbeyondthis.Macroeconomistsandpolicymakersarealsoconcernedwiththeyear-to-yearandquarter-to-quarterfluctuationsoftheeconomy.RealGDPdoesnotgrowsmoothlythroughtime,astheSolowgrowthmodelmightsuggest;rather,itsometimesgrowsveryrapidly,sometimeslessrapidly,andsometimesitfalls.TheclassicalmodelcanonlyexplainchangesinGDPasarisingfromchangesinthestocksoffactorsofproductionorchangesintechnology.Whilepopulationgrowthandtechnologicaladvancesareconvincingcandidatestoexplainlong-rungrowth,theyarelessplausibleasexplanationsofshort-runfluctuations.

Supplement10-2,“UnderstandingBusinessCyclesI:TheStylizedFacts”

TheirregularfluctuationsinGDPandcorrespondingfluctuationsinothermacroeconomicvariablesareknownasthebusinesscycle.Whilenotallbusinesscyclesareidenticalinlengthorseverity,theydosharecommonfeaturesthatleadustoseekasingleexplanation.(Thesecommonfeaturesareoftenreferredtoasstylizedfacts.)PartIVofthebookdevelopsatheoryofthebusinesscycleandexploresitsimplicationsforpolicy.

10-1 TheFactsAbouttheBusinessCycle

GDPandItsComponents

Figure10-1

Supplement1-3,“WhenIstheEconomyinaRecession?”

Figure10-2

ThegrowthrateofrealGDPhasfluctuatedconsiderablyovertimeandoccasionallyisnegativeduringperiodsofrecession.IntheUnitedStates,theNationalBureauofEconomicResearchistheofficialarbiterofwhenrecessionsbeginandend.TheNBERconsidersvariouseconomicindicatorsinmakingitsdeterminationaboutbusinesscycleturningpointsanddoesnotfollowtheconventionalruleofthumbthatdefinesarecessionastwosuccessivequartersofnegativeGDPgrowth.

FluctuationsinconsumptionandinvestmentspendingmimicthepatternoffluctuationsinoverallGDP.Inparticular,thegrowthrateofrealconsumptionspendingandthegrowthrateofrealinvestmentspendingbothtendtodeclineduringrecessions,butthedeclineininvestmentgrowthismorepronouncedthaninconsumptiongrowth.

UnemploymentandOkun’sLaw

Figure10-3

Figure10-4

TheeconomistArthurOkunnotedthatweshouldexpecttofindarelationshipbetweenunemploymentandrealGDP.Whentheunemploymentrateishigher,weshouldpresumablyexpecttofindthatrealGDPislower.Hesuggestedaruleofthumb,whichhasbecomeknownasOkun’slaw:

PercentageChangeinRealGDP=3%–2ChangeinUnemploymentRate.

Thisrelationshipstatesthatiftheunemploymentrateisunchanged,thenrealGDPwillgrowatitspotentialrateofabout3percent.And,ifunemploymentweretoincrease(decrease)byonepercentagepoint,thenGDPgrowthwouldfall(rise)byabout2percentagepoints.

LeadingEconomicIndicators

Economistsoftenneedtodevelopforecastsofwheretheeconomyisheadinginthefuture.Oneapproachistoconsiderleadingindicators,whichareeconomicvariablesthattypicallyfluctuateinadvanceofoveralleconomicactivity.FortheUnitedStates,theConferenceBoard,aprivatebusinessresearchgroup,constructstheIndexofLeadingEconomicIndicatorseachmonth.Theindexiscomposedoftendataseriesthatarebelievedtoanticipatechangesineconomicactivityroughlysixtoninemonthsinadvance.Theindexincludesthefollowing:

1. Averageweeklyhoursinmanufacturing

2. Averageweeklyinitialclaimsforunemploymentinsurance

3. Manufacturers’newordersforconsumergoodsandmaterials

4. Manufacturers’newordersfornondefensecapitalgoods,excludingaircraft

5. InstituteforSupplyManagement(ISM)newordersindex

6. Buildingpermitsfornewprivatehousingunits

7. Indexofstockprices

8. LeadingCreditIndex

9. Interestratespreadbetween10-yearTreasurybondsandthefederalfundsrate

10. Averageconsumerexpectationsforbusinessandeconomicconditions

Theindexisaveryimpreciseforecastingtoolbutneverthelessisusedasaninputintodecisionsbybusinessesandgovernmentpolicymakers.

10-2 TimeHorizonsinMacroeconomics

HowtheShortRunandLongRunDiffer

Themodelscoveredinthetextapplytoeithertheshortrun,thelongrun,ortheverylongrun.Thesedesignationshavemoretodowiththeflexibilityorinflexibilityoffactorsofproductionpricesthanwithstricttimelimits,asshowninthetablebelow.

Model

Assumptions

TimeFrame

Shortrun

Stickyprices,possibleunemploymentoflaborandcapital

Month-to-monthoryear-to-year

Longrun

Flexibleprices,fullemploymentoflaborandcapital;constantcapital,laborforce,andtechnology

Severalyears

Verylongrun

Flexibleprices,fullemploymentoflaborandcapital;variablecapital,laborforce,andtechnology

Severaldecades

Thekeytoexplainingshort-runfluctuationoftheeconomy,inthejudgmentofmostmacroeconomists,istheideathatpricesarenotfullyflexibleintheshortrun.Instead,somepricesarestickyanddonotchangeinresponsetoeverychangeinsupplyordemand.Observationoftheworldsupportsthisidea.Thereisalotofcasualevidencethatthepricesofatleastsomecommoditiesarenotveryflexibleintheshortrun.McDonald’sdoesnotchangethepriceofitshamburgersduringtheday,increasingthematlunchtimewhenthereisalotofdemandanddecreasingtheminthemiddleoftheafternoonwhenthereislessdemand.Mail-orderfirmsprintcatalogsthatsetpricesforperhapsthreemonthsinadvance.Restaurantshavemenusprinted.Laborcontractssetwagesformonthsoryearsinadvance.Thebasisofourshort-runmodeloftheeconomy,therefore,issomestickinessofprices.

CaseStudy:IfYouWanttoKnowWhyFirmsHave

StickyPrices,AskThem

Table10-1

Table10-2

Supplement10-3,“ArePricesSticky?I:EvidencefromIndividualTransactions”

Supplement10-4,“ArePricesSticky?II:Mail-OrderEvidence”

AlanBlinderstudiedthereasonsforpricestickinessbygoingdirectlytothesource—thefirms.Blinderaskedmanagershowoftentheychangedprices—mostoften,theanswerwasonceortwiceayear—andfoundclearevidenceofpricestickiness.Next,Blinderpresentedthemanagerswithalistof12theoriesofpricestickiness.Heaskedthemtolistwhichtheoriesdescribedtheirfirms.Notheorywasacceptedbyallfirms,andnotheorywasrejectedbyeveryfirm,indicatingthatthecausesofpricestickinesscanvaryacrossfirms.Themostwidelycitedsourceofpricestickinesswascoordinationfailure.

TheModelofAggregateSupplyandAggregateDemand

Theimplicationsofstickypricesarefar-reaching.Themostimportantpointisthat,whenpricesaresticky,GDPneednotalwaysbeatitsnaturalrate.Further,monetaryandfiscalpoliciescanaffectthelevelofoutputintheshortrun.Theseideasaresetoutintheaggregatedemand–aggregatesupplymodel.

10-3 AggregateDemand

TheQuantityEquationasAggregateDemand

Figure10-5

Aggregatedemandgivesarelationshipbetweenthepricelevelandthequantityofgoodsandservicesdemanded.Likearegulardemandcurve,itslopesdownward:atahigherpricelevel,fewergoodsaredemanded.Thereasonsthataggregatedemandslopesdownwardaremorecomplexthanthisanalogysuggests.WedeferthedetailedtheoryofaggregatedemandtoChapters11and12andworkforthepresentwiththesimplestpossibleaggregatedemandcurve,whichisbasedonthequantityequation.Recallthat

MV=PY,

whichwecanalsointerpretasamoneydemandequationoftheform

M/P=kY,

wherek=1/V.Thisistoosimpleaviewofmoneydemandforthereasonsdiscussedpreviously,mostnotablybecauseitomitstheinterestrate.Nevertheless,itisagoodstartingpoint.

WhytheAggregateDemandCurveSlopesDownward

ThisequationimpliesanegativerelationshipbetweenYandP.Ifincomeishigher,thereisagreaterdemandforrealmoneybalances.Ifthemoneysupplyisfixedinnominalterms,thenequilibriuminthemarketformoneyimpliesthatthepricelevelmustbelower.Or,toputitanotherway,alowerpricelevelincreasestherealsupplyofmoneyandthusimpliesagreatervolumeoftransactions,assumingfixedvelocity.

ShiftsintheAggregateDemandCurve

Figure10-6

SincetheaggregatedemandcurveisdrawnonadiagramwithPandYontheaxes,itwillshiftifeitherofthetwoothervariables(MandV)changes.Ifthemoneysupplyisreduced,holdingVfixed,thenrealbalancesarelowerandsooutputmustbelower.Theaggregatedemandcurveshiftsin.TheoppositeistrueifMisincreased.Similarly,adecreaseinvelocitywillshifttheaggregatedemandcurvein;anincreasewillshiftitout.

10-4 AggregateSupply

Aggregatesupplygivesarelationshipbetweenthegeneralpricelevelandthequantityofgoodssupplied.Weneedtoconsidertwocases:thelongrun,whenallpricesareflexible,andtheshortrun,whensomepricesaresticky.

TheLongRun:TheVerticalAggregateSupplyCurve

Weknowthatthesupplyofgoodsandservicesinthelongrundependsuponthetechnologyandtheavailablestocksofcapitalandlabor.Wealsoknowthatthelong-runanalysisisconductedentirelyinrealterms.Inotherwords,thesupplyofgoodsandservicesinthelongrundoesnotdependuponthepricelevelintheeconomy.Thismeansthatthelong-runaggregatesupplycurve(LRAS)isverticalatY.

Figure10-7

Economicgrowth,inthissetting,iscapturedbythefactthattheLRAScurveshiftstotherightovertime.Asthetechnologyimprovesortheeconomygetsmorecapitalandlabor,moregoodscanbeproduced.

Oneusefulwaytothinkaboutthismodelisintermsofequilibriumindifferentmarkets.TheLRAScurvesummarizesasituationwherethefactormarketsintheeconomyareinequilibrium.Giventhatthesemarketsareinequilibrium,weknowthatthesupplyofgoodsandservicesmustequalY.TheADcurvesummarizesasituationwherethemoneymarketisinequilibrium.

Figure10-8

Wecannowseewhythismodel,whileadequateforthelongrun,isnotofmuchuseforexplainingshort-runfluctuation.Nomatterhowmuchtheaggregatedemandcurvemovesaround,wecanseefromthismodelthattheonlylong-runconsequencewillbemovementsinthepricelevel.Theclassicaldichotomyholdsinthelongrun.Ifpriceswereflexibleintheshortrunaswellasthelongrun,theclassicaldichotomywouldholdintheshortrun,andchangesinaggregatedemandwouldhavenoeffectonoutput.

Itispossibleforfluctuationstoariseintheshortrun,evenwhenpricesareflexible,becauseofshiftsinaggregatesupply.Butsincetheavailablestocksoflabororcapitalchangeonlyslowlythroughtime,fluctuationsintechnologyaretheonlypossibleexplanationforshiftsinaggregatesupply.PerhapswesometimesexperienceveryrapidgrowthinGDPbecausewemaketechnologicalbreakthroughs,andperhapswesometimesseeslowergrowthinGDPbecausenobodyhascomeupwithanygoodideasrecently.Aschoolofmacroeconomicthoughtknownasreal-business-cycletheoryespousespreciselythisview.

TheShortRun:TheHorizontalAggregateSupplyCurve

Thereisaverysimplewaytocapturetheideaofpricestickinessinourmodel.Supposethatintheshortrun(perhapsaperiodofthreemonthsorso),thepriceleveldoesnotchangeatall.Thenwecanrepresentthisbyashort-runaggregatesupplycurvethatishorizontal.

Figure10-9

Astorytodemonstratethisisasfollows.Considerarepresentativefirmintheeconomy.Onceeverythreemonths,allthevicepresidentsmeetwiththechiefexecutiveofficer.ThevicepresidentoffinancecomesinwithhisExcelspreadsheetandpresentsapictureofthefinancialside;thevicepresidentofproductioncomesinwithhisspreadsheetandexplainsthecurrentcostside;thevicepresidentofmarketingcomesinwithhisspreadsheetandgiveshisforecastsfordemandoverthenextfewmonths.TheCEOlistenstothemall.Aftercarefullyweighingalltheirarguments,shedecidesonthepricethatthefirmwillchargeforitsproduct.Forthenextthreemonths,theythensellasmuchoraslittleasisdemandedatthatprice.Afterthreemonths,theygothroughthisprocessagain.

Figure10-10

Itshouldbeimmediatelyevidentthatthispresentsaverydifferentpictureoftheeffectsofshockstoaggregatedemand.Nowifaggregatedemandfalls,theshort-runimpactisnotafallinthepricelevel,butinsteadafallinsales.Conversely,ifaggregatedemandrises,theeffectwillbeanincreaseinsales,notinthepricelevel.

Thismodelhasanimmediateimplicationformonetarypolicy.Previously,whenthinkingaboutthelongrun,weconcludedthatFederalReservepolicyaffectsthepricelevelandtheinflationrate.Ifthatwerethewholestory,thenwewouldfindithardtoexplainwhyeconomistsandbusinesspeoplepaysomuchattentiontotheFed.Butnowweseethat,intheshortrun,theFedalsohasthepowertoaffecttheamountofoutputthattheeconomyproduces.Bycontractingthemoneysupply,theFedreducesoutputintheshortrun.Byincreasingthemoneysupply,theFedincreasesoutputintheshortrun.Onlyinthelongrundothesepoliciesaffectpricesandinflation.

FromtheShortRuntotheLongRun

Figure10-11

Figure10-12

Whatdoestheadjustmenttothelongrunlooklike?Followinganegativeaggregatedemandshock,firmsfacelowerdemandandsoreduceoutputatthefixedpricelevel.Iftheeconomywasoriginallyatthenaturalrate,thenitgoesintorecession.Giventhefallindemand,pricesandwageswillstarttofallandoutputwillincrease.Theeconomymovesbackdowntheaggregatedemandcurvetothenewlong-runequilibrium.Therecoveryfromarecessionischaracterizedbyfallingprices.

CaseStudy:AMonetaryLessonfromFrenchHistory

Supplement10-5,“DavidHumeontheRealEffectsofMoney”

Anexampleofhowamonetarycontractionaffectstheeconomycomesfromeighteenth-centuryFrance.Atthattime,themonetaryvalueofeachcoinwassetbygovernmentdecree.OnSeptember22,1724,thegovernmentreducedthevalueofitscurrencyby20percentovernight.Duringthenextsevenmonths,thevalueofthemoneystockwasreducedfurther,foratotaldeclineof45percent.Thegovernmentsoughtthischangetolowerpricestoalevelitdeemedacceptable.Althoughwagesandpricesfell,theydidnotdeclinebythefull45percent.Andittookyearsforthemtofallthatfar.Asevererecessionintheindustrialsectoraccompaniedthedeclineinthemoneysupply.Accordingly,theadjustmentofpricesinresponsetoadeclineinthemoneysupplyobservedineighteenth-centuryFranceisconsistentwithoursimpleanalysisofthetransitionfromshortruntolongrun.

10-5StabilizationPolicy

Economicfluctuationscomefromchangesinaggregatedemandoraggregatesupply.Ashiftintheaggregatedemandcurveiscalledademandshock,andashiftintheaggregatesupplycurveiscalledasupplyshock.Theseshockspushoutputandemploymentawayfromtheirlong-runornaturallevels.Stabilizationpolicydescribespolicyactionsintendedtoreducetheseverityofshort-runeconomicfluctuations.Suchpoliciesdampenthebusinesscyclebykeepingoutputandemploymentclosetotheirnaturallevels.

ShockstoAggregateDemand

Whenpricesaresticky,exogenousshockstoaggregatedemandwillcauseoutputfluctuations.Theassociatedcyclicalfluctuationsareusuallythoughttobecostlyandundesirable.Sincethe

Supplement10-6,“PricesStickinessandParetoEfficiency”

Figure10-13

Supplement10-7,“Velocityandthe1982Recession”

monetaryauthoritiescanaffectthelevelofdemandbychangingthemoneysupply,itisnaturaltoconsidertheuseofmonetarypolicytostabilizetheeconomy.Forexample,supposethatthevelocityofmoneyincreases(moneydemanddecreases).Thiswillshifttheaggregatedemandcurveoutward,generatingaboom.Outputincreasesintheshortrun;pricesriseinthelongrun.TheFed,however,couldtakeactiontooffsetthisshocktoaggregatedemand.Ifitdecreasedthemoneysupplyinresponsetotheincreaseinvelocity,itcouldstabilizeaggregatedemandandpreventthefluctuationinGDPandprices.

ShockstoAggregateSupply

Shockstotheeconomyneednotalwaysaffectaggregatedemand;theymightaffectaggregatesupply.Suchshocksaffectfirms’costsandhencethepricesthattheycharge;thustheyaresometimescalledpriceshocks.Examplesincludeagriculturalshocks,suchasbadweather,whichraisesfoodprices;governmentregulationofindustry;increasedunionpower,whichincreaseswages;andincreasesinworldenergyprices.Alloftheseshockshavetheeffectofincreasingthegeneralpricelevel.Ifaggregatedemandisunchanged,thenoutputwillfall.

Figure10-14

Figure10-15

Asbefore,theFedcouldtakeactiontooffsettheassociatedrecession;inparticular,itcouldincreasethemoneysupply.Butnotethattheconsequenceofthisisapermanentincreaseinthepricelevel.Sucharesponseisknownasanaccommodativemonetarypolicy.

Supplyshocksneednotalwaysbeadversebutsometimescanbefavorable.Anexampleisthecollapseofworldoilpricesin1986,whichresultedinadropindomesticenergyprices.Suchadeclineinoilpriceswouldshifttheshort-runaggregatesupplycurvedownward,leadingtoariseinoutputproducedintheshortrun.

Aggregatesupplyshocksmightalsoaffecttheamountofoutputthattheeconomycanproduceatfullemployment.Forexample,badweatherreducesagriculturalproductionandsocausesthenaturalrateofoutputtofall.Forsimplicity,weneglectsucheffectsandfocusontheeffectofaggregatesupplyshocksonthepricelevel.

CaseStudy:HowOPECHelpedCauseStagflationinthe1970sandEuphoriainthe1980s

Supplyshockssignificantlyaffectedtheworld’seconomiesinthe1970s.TheOrganizationofthePetroleumExportingCountries(OPEC)colludedtoreducethesupplyofoilandraiseitsprice.Thereweremajoroilpricerisesin1974andattheendofthedecade.Thisledtostagflation(thatis,stagnation,orrecession,combinedwithinflation)inmanycountries.Inthe1980s,oilpricesfell,leadingtodeclinesininflationandunemployment.

Supplement10-8,“UnderstandingBusinessCyclesII:ModelingCycles”

Inrecentdecades,OPEChasnotplayedamajorroleincausingeconomicfluctuations.EffortsatconservingenergyandtechnologicaladvanceshavemadetheU.S.economylessaffectedbyoilpriceshocks.Furthermore,thecontinuingshiftawayfromamanufacturingandtowardserviceshasreducedenergydemands.Today,withtheeconomyusing50percentlessoilperunitofGDP,ittakesamuchlargerincreaseinthepriceofoiltohavethesortsofeffectsontheeconomythatoccurredinthe1970sand1980s.Accordingly,whenoilpricesskyrocketedin2007andthefirsthalfof2008beforeplummetinginthesecondhalf,thesepricechangeshadsmallereffectsthantheywouldhavehadafewdecadesearlier.

10-6 Conclusion

Supplement10-9,“TheEconomyintheLongRunandVeryLongRun:SummaryofPartsIIandIIIandIntroductiontoPartIV”

Supplement10-10,“TheCostofBusinessCycles”

Wenowhaveabasicmodeloftheeconomyintheshortandlongrun.Priceadjustmenttendstoreturntheeconomytothenaturalrateofoutputinthelongrun.Thenaturalrateofoutputgrowsthroughtime,soeconomicfluctuationscanbeconsideredasshort-runmovementsaroundalong-runtrend.Theeconomyishitbymanyshocks,bothtopricesandtoaggregatedemand.Becausepricesarestickyintheshortrun,suchshocksexhibitpersistence;theyhavelong-lastingeffectsontheeconomy.Accordingly,theremaybescopeforcountercyclicalstabilizationpolicy.

Thesimplemodelofaggregatedemandandaggregatesupplypresentedinthischapterisillustrativebutincomplete.Inthefollowingtwochapterswedevelopamorecompletemodelofaggregatedemand.InChapter14wepresentamoresophisticatedandsatisfactorytheoryofaggregatesupply.StabilizationpolicyisexaminedindetailinChapter16.

ADDITIONALCASESTUDY

10-1 TheDatingofBusinessCycles

Economiesexhibitshort-runfluctuationsinoutputandothervariables,knownasthebusinesscycle.Whentheeconomyisdoingwell,sothatoutputandemploymentarerising,itissaidtobeexpanding.Ifoutputandemploymentstarttofall,theeconomyissaidtobecontracting(orinrecession).Theturningpointfromexpansiontocontractionisknownasthepeakofthebusinesscycle,whiletheturningpointfromcontractiontoexpansioniscalledthetrough.

AsdiscussedinSupplement1-3,theresponsibilityforjudgingwhethertheeconomyisexpandingorcontractinglieswiththeBusinessCycleDatingCommitteeoftheNationalBureauofEconomicResearch(NBER).TheNBERisanonprofiteconomicresearchorganizationbasedinCambridge,Massachusetts.

Whenmakingitsassessment,thiscommitteelooksatthebehaviorofvariousdata,includingrealpersonalincome,industrialproduction,sales,andemployment.Fordiscussionofthecommittee’swork,seeR.Hall,“TheBusinessCycleDatingProcess,”NBERReporter(Winter1991/2):1–3.

Table1showsbusinesscyclechronologiessince1854.TheyearssinceWorldWarIIhavebeencharacterizedbyshorterrecessionsandlongerexpansionsthanoccurredpriortothattime.

Table1 BusinessCycleExpansionsandContractions

DurationinMonths

DurationinMonths

Trough

Peak

Contraction

Expansion

TroughfromPreviousTrough

PeakfromPreviousPeak

Dec1854

Jun1857

30

Dec1858

Oct1860

18

22

48

40

Jun1861

Apr1865

8

46

30

54

Dec1867

Jun1869

32

18

78

50

Dec1870

Oct1873

18

34

36

52

Mar1879

Mar1882

65

36

99

101

May1885

Mar1887

38

22

74

60

Apr1888

Jul1890

13

27

35

40

May1891

Jan1893

10

20

37

30

Jun1894

Dec1895

17

18

37

35

Jun1897

Jun1899

18

24

36

42

Dec1900

Sep1902

18

21

42

39

Aug1904

May1907

23

33

44

56

Jun1908

Jan1910

13

19

46

32

Jan1912

Jan1912

24

12

43

36

Dec1914

Aug1918

23

44

35

67

Mar1919

Jan1920

7

10

51

17

Jul1921

May1923

18

22

28

40

Jul1924

Oct1926

14

27

36

41

Nov1927

Aug1929

13

21

40

34

Mar1933

May1937

43

50

64

93

Jun1938

Feb1945

13

80

63

93

(Continuedonnextpage)

Table1(continued)

DurationinMonths

DurationinMonths

Trough

Peak

Contraction

Expansion

TroughfromPreviousTrough

PeakfromPreviousPeak

Oct1945

Nov1948

8

37

88

45

Oct1949

Jul1953

11

45

48

56

May1954

Aug1957

10

39

55

49

Apr1958

Apr1960

8

24

47

32

Jan1961

Dec1969

10

106

34

116

Nov1970

Nov1973

11

36

117

47

Mar1975

Jan1980

16

58

52

74

Jul1980

Jul1981

6

12

64

18

Nov1982

Jul1990

16

92

28

108

Mar1991

Mar2001

8

120

100

128

Nov2001

Dec2007

8

73

128

81

June2009

18

91

Average,AllCycles

1854–2009(33cycles)

16

42

56

55a

1854–1919(16cycles)

22

27

48

49b

1919–1945(6cycles)

18

35

53

53

1945–2009(11cycles)

11

59

73

66

Notes:a32cycles;b15cycles.Becausethedatastartin1854withatrough,thenumberof