Macroeconomic

Stability
The Business
Cycle and Macro
Equilibrium

1
The Business Cycle
 Business reacts to changes in
the Real GDP.
 As GDP rises and falls, it effects
how businesses perform.
Sometimes it can be used as a
predictor.

2
4 Stages
1. Recession – period of decline
for 2+ quarters (6+ months)
2. Trough – GDP stops going
down and begins going up.
3. Expansion – period when GDP
begins to rise.
4. Peak – GDP stops going up. 3
Business Cycle

4
Depression
 An extended recession.
 Highunemployment, high
shortage of goods, etc.

5
Economic Instability
 Recession helps ease inflation.
 Stagflation is when there is no
great growth, but inflation rises.
 Seen in the 1970’s.

6
Economic Instability
 GDP Gap – difference between
the actual GDP and the potential
GDP if all resources were fully
employed.

7
Macro Equilibrium
 Remember supply and demand?
Where they meet is
equilibrium.
 This can be used to see how the
economy as a whole is doing.

8
Aggregate Supply
 The total amount of stuff that
could be supplied at a given
price.
 An Aggregate Supply Curve can
be constructed to show the
relationship between price and
total GDP output.
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Aggregate Supply
 In
other words, this is the total
supply for the whole economy.

10
AS Shifts
 Increases in aggregate supply
are caused by changes in the
cost of production.
 This would cause the curve to
shift to the right.
 Causes – lower cost of
resources, increased labor, new
technology, lower taxes, etc. 11
AS Shifts
 Decreased aggregate supply is
caused by an increase in
production cost.
 Curve moves to the left.
 Causes – higher oil prices,
higher interest rates on loans,
higher taxes, immigration laws,
etc. 12
Aggregate Demand
 Summary of the total demand
for stuff in the economy.
 Curve shows the relationship
between price level and GDP
also.
 If prices drop, more GDP could
be purchased.
13
AD Shifts
 Increasescan show an increase
in consumer spending.
 Can be caused by transfer
payments, lower taxes, etc.

14
AD Shifts
 Decreases show less buying
power by consumers.
 Caused by higher taxes, less
spending, etc.

15
Equilibrium
 Intersection of aggregate supply
and aggregate demand. This is
where real GDP is consistent
with a given price level.
 Policy makers use these curves
to help make decisions about
government involvement.
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