BUSINESS CYCLE
Short time fluctuation in the GDP is referred to as business cycle
NOMINAL VARIABLES
Measured in terms of dollars EG, Quantity of money Inflation rate
REAL VARIABLES
Measured relative to priced or quantities Eg, Quantity of goods and services produced, Output ,Interest rates ,Unemployment
Y = C + I + G + NX C: Consumption - private spending by consumers I: Investment - includes equipment, inventory, and new homes G: Government spending - does not include transfer payments X: Exports - goods or services that an entity chooses to produce for another entity M: Imports - goods and services from another
High inflation High interest rates Real value of dollar increase Net exports fall Decrease in output demanded
THE INFLATION RATE AND CONSUMPTION (THE WEALTH EFFECT)
Decrease of inflation rate Consumers feel wealthy Spend more increase the demand on goods and services
WHAT CAUSES THE SHIF OF AGGREGATE DEMAND CURVE IN THE ONG RUN
Labour Capital Natural resources Technological knowledge
AGREGATE SUPPLY
Volume of goods and services produced within an economy at a given price level
(this shows the ability of an economy to deliver goods and service to meet the demand )
** In the short run short run aggregate supply is upward Prabudda Missaka s3211475
sloping
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Short run
Long run
Y = Ynatural + a(P - Pexpected). In this equation, Y is output, Ynatural is the natural rate of output that exists when all productive factors are used at their normal rates, ais a constant greater than zero, P is the price level, and Pexpected is the expected price level. This equation holds only in the short run because in the long run the aggregate supply curve is a vertical line, as output is dictated by the factors of production alone.