Economic Analysis ECON 100B
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This 3 page Class Notes was uploaded by Dr. Janiya Bernier on Thursday October 22, 2015. The Class Notes belongs to ECON 100B at University of California - Berkeley taught by Staff in Fall. Since its upload, it has received 13 views. For similar materials see /class/226713/econ-100b-university-of-california-berkeley in Economcs at University of California - Berkeley.
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Date Created: 10/22/15
ECON 100B GSI Juan Sebastian Lleras UC Berkeley Fall 2006 Section Notes October 5 1 Business Cycle Analysis 11 Introduction We want to look what happens to actual GDP during short periods of time Note that we are going to be looking at aggregate output not output per worker The short run in this case means that we are going to deal with economic growth and uctuations during periods of two years or less Deviations from potential gdp are roughly 4 points for the United States These deviations from potential are measured by the Output Ratio Y 7 YET3H X 100 12 Components of the Business Cycle 0 Peak Maximum level reached before it turns down 0 Recession Economy is contracting It has to go on for at least 6 months and be pervasive affecting many sectors of the economy and geographic regions 0 Trough llinimum point 0 Recovery and Expansion Economy is growing and expanding Som e facts 0 Most peaks have positive output ratios and troughs have usually negative output ratios 0 Length of expansions last on average 4 years and recessions usually are 12 months or less this will be important in the coming weeks of the course 13 Recessions 0 Hard landing Period when the economy is contracting y39 lt 0 0 Soft Landing Growth recession so the economy is not growing as fast as potential y39 gt 0 and y39lty39N ECON 100B GSI Juan Sebastian Lleras UC Berkeley Fall 2006 2 Keynsian Cross Model 21 Expenditures and Income Attempt to explain the level of equilibrium income Ye Here Actual Expenditures Actual Income EYCIGX7M Here the 45 line determines the actual equilibrium income Planned Expenditure Ep We assume C GP G GP X Xp M Mp however I 1p Iu Where subscriptp means planned EYCIpGpXpiMp AllExogenousH 22 Consumption Function 0 Co HIPCY T What might in uences our consumption independent to what is happening to the income ICVCI 1 Interest Rates R 2 Consumer Con dence 3 Wealth 4 Expected Income mpcY 7 T is called the induced component mpc Marginal Propensity to Consume and 0 lt mpc lt 1 usually In the US mpcm 09 Now putting everything together we get Ep CplpGp XpiMp C0mpCY7mchlpGp XpiMp All except Y is autonomous exogenous Therefore we get E17 Cp1pGPXp Mp ApmPCY Where Ap Autonomous Planned Expenditure In a graph Y vs E changes in any of the components of A17 shifts the line parallel to the previous line ECON 100B GSI Juan Sebastian Lleras UC Berkeley Fall 2006 23 Equilibrium Equilibrium is a situations wheew there is no pressure for change which in turn implies that all plans must be fully realized Y Ye ltgt E Ep where E E17 Iu at equilibrium Iu 0 At equilibrium we get Ye Aermche limpcYe Ap yei l 7 mp0 There is nothing inherently desirable about being in equilibrium income Y7 y Ye In general Yn poten tial GDP is the steady state level of Y in the Short Run Ye equilibrium output is where Actual Expenditures Planned Expenditures nothing to do with the Solow model thus with potential GDP What happens when the economy is not at equilibrium level Think about the following Y E Actual Production Ep Planned Sales Difference between planned and actual expenditures goes into inventories unplanned If the economy is a equilibrium there is no reason to move away from equilibrium If it is not on equilib rium there are natural factors that will drive the economy toward equilibrium the adjustment process typically lasts about 6 moths Here are the two disequilibria that you might encounter in the Keynsian Cross model Suppose the economy is below the equilibrium level thus planned expenditures will be greater than actual expenditures Therefore as there is more consumption than production the inventories unplanned start to decrease and rms need to boost output hire more workers overtime etc and output is going to increase until E Ep The other case is when the economy is above the equilibrium level E gt Ep In this case planned expendi tures are less then actual expenditures since the rms produced more than it is going to be consumed their unplanned inventories increased and they need to cut production layoff workers reduce hours etc thus the output is going to fall until E Ep
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