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Published by:
McGraw Hill Education (2005)
Chapter from:
"Introducing Advanced Macroeconomics: Growth and Business Cycles"
41 pages
Chapter 19. The main challenges for macroeconomic theory are to explain the long-term economic growth and the short-term business fluctuations observed in the real world. This book offers an introduction to advanced economic analysis of these issues and seeks to bridge the gap between the typical intermediate macroeconomics text and the more advanced texts used at the graduate level. Each chapter ends with an extended summary highlighting the main points to be learned and is followed by a number of exercises intended to deepen the student's understanding of the material covered. Chapter 19: Throughout economic history, the capitalist market economies of the world have gone through recurrent periods of boom and bust. This is the fascinating phenomenon of business cycles described in Chapter 14. Although long periods of high economic growth have sometimes led people to believe that the business cycle was dead. A fundamental challenge for macroeconomic theory is to explain why the economy goes through these cyclical movements rather than evolving smoothly over time. The two previous chapters derived the economy's aggregate supply curve and its aggregate demand curve. In this chapter we bring the two curves together in a complete macro model which enables us to determine the levels of total output and inflation in the short run. This model allows us to investigate the causes of the fluctuations in economic activity which we observe in the real world. We will illustrate how business fluctuations may be seen as the economy's reaction to various shocks which tend to shift the aggregate supply and demand curves. We will also study the extent to which our model is able to reproduce the most important stylized facts of the business cycle.
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