Chapter 33

Chapter 33 begins with the concept of the business cycle, which is the fluctuations in the economy. The fluctuations are caused by recessions or depressions, depending on the severity. Depressions are far worse and uncommon compared to recessions. The real GDP is the most used source to monitor the business cycle's fluctuations. However, fluctuations are still very unpredictable. The classical economic theory states that nominal variables like money supply and price do not effect the real variables such as employment and outputs. However, the flaw of this theory is that is mainly accurate for the long, not short run. Instead, an aggregate supply and demand model is used for the short run. In this model, the supply and demand level out to a balance. The aggregate demand slopes downward because lower price levels increase the money in households that increases spending and lower prices reduce the demand for money so as money is put into assets, interest rates fall, stimulating spending in investments. The final reason is that lower price levels reduces interest rates, depreciates the dollar in  the foreign currency market, increasing the net exports. Policies that increase consumption, government purchases, investment, or net exports increases aggregate demand. Anything that reduces these things has the inverse affect, reducing the aggregate demand. The long run aggregate supply curve is vertical. The supply relies on the labor, capital, natural resources and technology. Three theories are considered for the reason the supply curve slopes upward. Things that change the economy's ability to produce products shift the short term aggregate supply curve and may shift the long term one as well