Business Fluctuations and the theory of Aggregate Demand

Business Fluctuations
and the theory of
Aggregate Demand

The history of American capitalism is one of recurrent periods of boom and bust, of recessions and expansions. Sometimes. jobs are hard to find. factories are idle. and profits.are low. These downturns are usually short and mild. as was the case in’ 1990-1991. Infrequently. as during the 19305 in the Great Depression. the contraction may persist for a decade, and cause widespread economic hardships.

At other times. business conditions are healthy, with plenty of vacancies. factories working overtime, and robust profits. The long expansion of the 1990s was a prosperous period font American consumers-but a perplexing one for economists. ‘The economy grew rapidly; labor and product mar etch ‘ere exceptionally tight; unemployment was 10 ‘and capacity utilization was high.Yet, unlike earlier long expansions, inflation remained’ thou bout the expansion.The stock market rose to seen before a “n era of American globalization and the in Or as this the same capitalism accompanied “special cir Soliloquies ed to rap’ d growth and low inflation?

The moniker ran-anons in economic are known as business cedes,or business fluctuations, and are covered in the first part of this chapter. understanding business. cycles has pro red one of the most durable problems in all of macroeconomics. “That causes business fluctuations? How can government policies reduce their virulence? Economists were largely unable to answer these questions until the 1930 s. At that point, the revolutionary macroeconomic theories of John Maynard Keynes pointed to the importance of the forces of aggregate die” mans in determining business cycles. The lesson of Keynesian economics is that changes in aggregate demand can have a Pocketful impact on the overall level of output, employment, an,d prices in the “short run.

 There have been many challenges; modifications,  and elaborations to the basic Keynesian framework since  its earliest.days. Still, the.theory of aggregate demand re-  mains the best way to understand the business cycle. In the second part of this chapter, therefore, we describe the foundations of aggregate demand analysis and show the basic Keynesian approach to business cycles,This discussion pays the way for the next chapter’s examination of the Keynesian multiplier model, which describes the simplest income-determination thundery. Figure 23-1 provides a road map for the analysis.

Business Fluctuations and the theory of Aggregate Demand

Business Fluctuations
and the theory of
Aggregate Demand

The chapter begins with an analysis of the business cycle. It then develops the theory of aggregate demand to explain how demand shifts produce’ business fluctuations.

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