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Introduction
Economic activity fluctuates from year to year. In most years production of goods and services rises. On average over the past 50 years, production in the Indian economy has grown by about average 4.7 percent per year. In some years normal growth does not occur, causing a recession.
Introduction
A recession is a period of declining real incomes, and
unpredictable.
Fluctuations in the economy are often called the
business cycle. Most macroeconomic variables fluctuate together. As output falls, unemployment rises.
Most macroeconomic variables fluctuate together. Most macroeconomic variables that measure some type of income or production fluctuate closely together. Although many macroeconomic variables fluctuate together, they fluctuate by different amounts.
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Real GDP
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As output falls, unemployment rises. Changes in real GDP are inversely related to changes in the unemployment rate. During times of recession, unemployment rises substantially.
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Most economists believe that classical theory describes the world in the long run but not in the short run. Changes in the money supply affect nominal variables but not real variables in the long run. The assumption of monetary neutrality is not appropriate when studying year-to-year changes in the economy.
by real GDP. The overall price level measured by the CPI or the GDP deflator.
Supply:
aggregate supply to explain short-run fluctuations in economic activity around its long-run trend. The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level. The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level.
Aggregate supply
Aggregate demand
Equilibrium output
Quantity of Output
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between nominal variable ( i.e. Price) & real variable (i.e. Quantity)
due to the change in the price of the goods & services. The four components of GDP (Y) contribute to the aggregate demand for goods and services. Y = C + I + G + NX If we assume that government purchase is fixed by the policy & other three components depends on the economic condition we can show the graph of aggregate demand as follows.
Quantity of Output
Effect
The Price Level and Net Exports: The Exchange-Rate
Effect
Effect
more wealthy, which in turn encourages them to spend more. This increase in spending by consumer means more demand for goods & services.
In this exercise only purchasing power of the money
will change. Meance you will spend the same amount but you will get more goods due to low price.
The Price Level and Investment: The Interest Rate Effect: Due to the lower prices person will always wish to hold lesser amount of money with him (because he is able to have more goods in lesser amount of money, so no need to hold large amount) He perhaps will keep this amount with bank to earn good saving interest or he will lend it to some one. Banks will be able to give more number of loans(because banks will be heaving more money due to deposit like this) Thus the lower price level always increases the demand of spending (by cash or by loan).
Rate Effect
The lower price of goods & services finally will bring
down the interest rate, due to which few people will be motivated to invest abroad. This higher rate of cross boundary investment will bring demand for the more foreign currency than the domestic one, which will depreciate the value of the domestic currency. It will result in expansive imported goods & relatively cheaper domestic goods Automatically demand for the domestic goods will increase.
shows that if price level falls it will raises the overall demand of goods and services.
Many other factors, however, affect the quantity of
demand curve shifts. This shift may arise because of Consumption, Investment, Govt. Purchases, Net Export
P1
D2
Aggregate demand, D1 0
Y1
Y2
Quantity of Output
price will be different due to the supply of the money, but production of goods & services will be the same. This is true for all basic necessity.
2. . . . does not affect the quantity of goods and services supplied in the long run. Quantity of Output
Shift: The long run level of the production is sometimes called potential output or full employment output Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve. The shifts may be categorized according to the various factors in the classical model that affect output. This shift may arise due to Labor, Capital, Natural Resources, Technological Knowledge
Shifts arising Labor- immigration of the labor Capital-Increase / Decrease in capital stock Natural Resources- Dependency on Natural Resources Technological Knowledge- Change in the technology
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should be viewed as deviations from the continuing long-run trends. In the short run, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied. A decrease in the level of prices tends to reduce the quantity of goods and services supplied.
2. . . . reduces the quantity of goods and services supplied in the short run.
Y2
Quantity of Output
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mislead suppliers about what is happening in the markets in which they sell their output: A lower price level causes misperceptions about relative prices.
These misperceptions induce suppliers to decrease the quantity of goods and services supplied.
Nominal wages are slow to adjust, or are sticky in the short run: Wages do not adjust immediately to a fall in the price level. A lower price level makes employment and production less profitable. This induces firms to reduce the quantity of goods and services supplied.
Prices of some goods and services adjust sluggishly in response to changing economic conditions: An unexpected fall in the price level leaves some firms with higher-than-desired prices. This depresses sales, which induces firms to reduce the quantity of goods and services they produce.
firms rise the wages of the workers to take better out put from them (remember low of supply).. But when the sell price dont rise as per expectation than this higher rate of salary turns in to the financial burden for the firm. So generally, to reduce the cost burden of the production & salary , firms also reduces the production Because of this reduced supply, curve will shift left.
Equilibrium price
Quantity of Output
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P P2 P3 B D
Aggregate demand, AD
AD2 0 Y2 Y 4. . . . and output returns to its natural rate. Quantity of Output
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Output falls below the natural rate of employment. Unemployment rises. The price level rises.
Aggregate demand
0 Y2 Y Quantity of Output
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stagflationa combination of recession (falling out put) & inflation (rising prices)
Output falls and prices rise. Policymakers who can influence aggregate demand cannot offset both of these adverse effects simultaneously.