Chapter 8Chapter OutlineWhat Is a Business Cycle?Slide 4Figure 8.1 A business cycleSlide 6Table 8.1 NBER Business Cycle Turning Points and Durations of Post–1854 Business CyclesBusiness Cycle FactsSlide 9Slide 10Summary 10Figure 8.2 Cyclical behavior of the index of industrial productionFigure 8.3 Cyclical behavior of consumption and investmentFigure 8.4 Cyclical behavior of civilian employmentFigure 8.5 Cyclical behavior of the unemployment rateFigure 8.6 Cyclical behavior of average labor productivity and the real wageSlide 17Slide 18Slide 19Figure 8.9 Industrial production indexes in six major countriesBusiness Cycle Analysis: A PreviewBusiness Cycle AnalysisSlide 23Slide 24Slide 25Slide 26Figure 8.10 The aggregate demand–aggregate supply modelSlide 28Figure 8.11 An adverse aggregate demand shockSlide 30Slide 31Slide 32Figure 8.12 An adverse aggregate supply shock© 2008 Pearson Addison-Wesley. All rights reservedBusiness CyclesChapter 8© 2008 Pearson Addison-Wesley. All rights reserved8-2Chapter Outline•What is a Business Cycle?•The American Business Cycle: The Historical Record–Read this section by yourself•Business Cycle Facts•Business Cycle Analysis: A Preview© 2008 Pearson Addison-Wesley. All rights reserved8-3What Is a Business Cycle? •U.S. research on cycles began in 1920 at the National Bureau of Economic Research (NBER)–NBER maintains the business cycle chronology—a detailed history of business cycles–NBER sponsors business cycle studies© 2008 Pearson Addison-Wesley. All rights reserved8-4What Is a Business Cycle? •Burns and Mitchell (Measuring Business Cycles, 1946) makes five main points about business cycles:1. Business cycles are fluctuations of aggregate economic activity, not a specific variable [real GDP, real income, employment, industrial production, and wholesale-retail sales]2. There are expansions and contractions - Severe recession is called Depression.3. Economic variables show comovement—they have regular and predictable patterns of behavior over the course of the business cycle4. The business cycle is recurrent, but not periodic5. The business cycle is persistent© 2008 Pearson Addison-Wesley. All rights reserved8-5Figure 8.1 A business cycleTurning pointBusiness Cycle Business Cycle© 2008 Pearson Addison-Wesley. All rights reserved8-6What Is a Business Cycle? •NBER BCD committee waits a long time to make a decision–July 1990 peak announced April 1991 (9 months–March 1991 trough announced December 1992 (21 months)–March 2001 peak announced November 2001 (8 months)–November 2001 trough announced July 2003 (20 months)•Why? Data revisions; need to be sure of turning point, not temporary movement [simply put, they don’t know for sure ]© 2008 Pearson Addison-Wesley. All rights reserved8-7Table 8.1 NBER Business Cycle Turning Points and Durations of Post–1854 Business Cycles© 2008 Pearson Addison-Wesley. All rights reserved8-8Business Cycle Facts •All business cycles have features in common–The cyclical behavior of economic variables—direction and timing•What direction does a variable move relative to aggregate economic activity?–Procyclical: in the same direction–Countercyclical: in the opposite direction–Acyclical: with no clear pattern© 2008 Pearson Addison-Wesley. All rights reserved8-9Business Cycle Facts •All business cycles have features in common–The cyclical behavior of economic variables—direction and timing•What is the timing of a variable's movements relative to aggregate economic activity?–Leading: in advance–Coincident: at the same time–Lagging: after© 2008 Pearson Addison-Wesley. All rights reserved8-10Business Cycle Facts •Cyclical behavior of key macroeconomic variables–Procyclical•Coincident: industrial production, consumption, business fixed investment, employment•Leading: residential investment, inventory investment, average labor productivity, money growth, stock prices•Lagging: inflation, nominal interest rates•Timing not designated: government purchases, real wage© 2008 Pearson Addison-Wesley. All rights reserved8-11Summary 10Think about the crisis© 2008 Pearson Addison-Wesley. All rights reserved8-12Figure 8.2 Cyclical behavior of the index of industrial productionProcyclical and Coincident© 2008 Pearson Addison-Wesley. All rights reserved8-13Figure 8.3 Cyclical behavior of consumption and investmentVolatility: Investment>durables>nondurable, servicesProcyclical with different volatilities (sensitivity)© 2008 Pearson Addison-Wesley. All rights reserved8-14Figure 8.4 Cyclical behavior of civilian employmentProcyclical and Coincident© 2008 Pearson Addison-Wesley. All rights reserved8-15Figure 8.5 Cyclical behavior of the unemployment rateCountercyclical and Coincident© 2008 Pearson Addison-Wesley. All rights reserved8-16Figure 8.6 Cyclical behavior of average labor productivity and the real wageProcyclical? Leading?© 2008 Pearson Addison-Wesley. All rights reserved8-17Figure 8.7 Cyclical behavior of nominal money growth and inflationProcyclical, M2 leads, but Inflation lags© 2008 Pearson Addison-Wesley. All rights reserved8-18Figure 8.8 Cyclical behavior of the nominal interest rateProcyclical ang lagging, like inflation© 2008 Pearson Addison-Wesley. All rights reserved8-19Business Cycle Facts •International aspects of the business cycle–The cyclical behavior of key economic variables in other countries is similar to that in the United States–Major industrial countries frequently have recessions and expansions at about the same time–Fig. 8.9 illustrates common cycles for Japan, Canada, the United States, France, Germany, and the United Kingdom –In addition, each economy faces small fluctuations that aren't shared with other countries© 2008 Pearson Addison-Wesley. All rights reserved8-20Figure 8.9 Industrial production indexes in six major countries© 2008 Pearson Addison-Wesley. All rights reserved8-21Business Cycle Analysis: A Preview •What explains business cycle fluctuations?–2 major components of business cycle theories•A description of the shocks•A model of how the economy responds to shocks–2 major business cycle theories•classical theory •Keynesian theory –Study both theories in aggregate demand-aggregate supply (AD-AS) framework© 2008 Pearson Addison-Wesley. All rights reserved8-22Business Cycle Analysis•Aggregate demand and aggregate supply: a brief introduction–The model (along with the