Econ 104 1st Edition Lecture 13Outline of Last Lecture I. Business CycleII. IndicatorsIII. International BusinessOutline of Current Lecture II. International Business Cycle III. Aggregate Demand Current LectureI. International Aspects of the Business Cycle a. Major Industrial countries frequently experience recessions and expansions at the same timeb. What causes business cycles?i. Shocks to Aggregate Demand (AD)1. Sudden change in wealth (household)2. Pessimism or optimism about the future3. Change in government policyii. Shocks to Aggregate Supply (AS)1. Sudden change in the price of oil2. Inventions or innovations3. Sudden change in factors of production other than capital or labora. EX: drought, earthquakeII. Notations and Definitionsa. Y = output/income/real GDP/ national incomeThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.b. Y BAR = potential real GDP on PPFc. Y < Y BAR = recession (unemployment up, national income down)d. Y > Y BAR = inflationary boome. SRAS: short run aggregate supply i. Quantity of real GDP supplied by firms in the short runf. LRAS: long run aggregate supply i. Real GDP supplied in the long run AKA potential g. AD: aggregate demand i. C + I + G + (X-M)h. GDP Gap = Y – Y BAR = actual potential i. T = taxesj. G = Government Spending k. T – G = Government Budgetl. T – G > 0 = government budget surplus m. T-G < 0 = government budget deficit n. HH = house hold o. ROW = rest of the worldA shock to AS: Oil Price ShockGreen = LRASBlue = AD Red = SRAS III. Shocks that cause business cycles are transmitted abroad through a. Tradeb. Financial marketsc. EXAMPLE: financial crisis and Great Recession ( 07-09)IV. Contagion and how shocks are transmitted – what is the sequence?a. Shocks transmitted through tradei. E.g.: Great Recession1. In US = loss of wealth (pessimism) a. C down, Income down i. Imports from ROW down 2. In ROW a. US demand for goods in down i. Aggregate demand is downb. Shocks transmitted through financial marketsi. E.g.1. great recession in US a. Stock prices down b. HH wealth down i. C down and AD down in US2. ROWa. Other country investors hold US stock i. US stock prices down 1. HH down in ROWAD
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