Name
What starts the
recession?
What happens in the
recession?
Why does it happen?
Name
What starts the
expansion?
What happens in the
expansion?
Why does it happen?
Demand Led Recession
Keynesian Theory
Misperception Theory
Supply Led Recession
Real Business Cycle
Theory
A drop in AD (a
A drop in AD (a
A drop in AS (a
decrease in C, I, G, or decrease in C, I, G, or decline in resources)
NX)
NX)
Prices fall
Prices fall
Prices rise
Income falls
Income falls
Income falls
Unemployment rises
Unemployment rises
Unemployment rises
(stagflation)
With the drop in AD With the drop in
With the decrease in
and interest rates,
prices (macro event), resources there are
prices don’t full
companies
fewer goods
adjust downward
misperceive this as a
produced in the
(stickiness). This
decline in demand for economy. This
creates a surplus of
their good (micro
pushes prices higher
goods. Companies
event). Companies
and interest rates
respond by cutting
respond by cutting
higher.
production and
production and
laying workers off
laying workers off
Demand Led Expansion
Keynesian Theory
Misperception Theory
A rise in AD (an
increase in C, I, G, or
NX)
Prices rise
Income rises
Unemployment falls
With the rise in AD
and interest rates,
prices don’t full
adjust upward
(stickiness). This
creates a shortage of
goods. Companies
respond by
increasing production
and hiring more
workers
A rise in AD (an
increase in C, I, G, or
NX)
Prices rise
Income rises
Unemployment falls
With the rise in
prices (macro event),
companies
misperceive this as an
increase in demand
for their good (micro
event). Companies
respond by
increasing production
and hiring more
workers
Supply Led Expansion
Real Business Cycle
Theory
A rise in AS (an
increase in resources)
Prices fall
Income rises
Unemployment falls
With the increase in
resources there are
more goods produced
in the economy. This
pushes prices lower
and interest rates
lower.
1. Consumers become more confident: ( AD / AS ) will ( Inc / Dec ) which causes, in the short run,
income to ( Inc / Dec ), unemployment ( Inc / Dec ), and prices to ( Inc / Dec ). This
economy would be described as undergoing a ( Recession / Expansion ).
2. The Government raises taxes on consumers: ( AD / AS ) will ( Inc / Dec ) which causes, in the
short run, income to ( Inc / Dec ), unemployment ( Inc / Dec ), and prices to ( Inc / Dec
). This economy would be described as undergoing a ( Recession / Expansion ).
3. Americans increase their purchases of I-Pods which are produced in China: ( AD / AS ) will (
Inc / Dec ) which causes, in the short run, income to ( Inc / Dec ), unemployment ( Inc /
Dec ), and prices to ( Inc / Dec ). This economy would be described as undergoing a
( Recession / Expansion ).
4. The price of oil and gas increases as supplies lessen: ( AD / AS ) will ( Inc / Dec ) which causes,
in the short run, income to ( Inc / Dec ), unemployment ( Inc / Dec ), and prices to ( Inc
/ Dec ). This economy would be described as undergoing a ( Recession / Expansion ).
5. The US pulls out of Iraq and military spending is cut: ( AD / AS ) will ( Inc / Dec ) which
causes, in the short run, income to ( Inc / Dec ), unemployment ( Inc / Dec ), and prices
to ( Inc / Dec ). This economy would be described as undergoing a
( Recession / Expansion ).
6. The French increase their preference for American made cars: ( AD / AS ) will ( Inc / Dec )
which causes, in the short run, income to ( Inc / Dec ), unemployment ( Inc / Dec ), and
prices to ( Inc / Dec ). This economy would be described as undergoing a ( Recession /
Expansion ).
7. Global warming harms agricultural production: ( AD / AS ) will ( Inc / Dec ) which causes, in
the short run, income to ( Inc / Dec ), unemployment ( Inc / Dec ), and prices to ( Inc /
Dec ). This economy would be described as undergoing a ( Recession / Expansion ).
8. The internet increases the speed of job matching and natural rate of unemployment falls: ( AD /
AS ) will ( Inc / Dec ) which causes, in the short run, income to ( Inc / Dec ),
unemployment ( Inc / Dec ), and prices to ( Inc / Dec ). This economy would be
described as undergoing a ( Recession / Expansion ).
9. Investors become optimistic and sentiments improve: ( AD / AS ) will ( Inc / Dec ) which
causes, in the short run, income to ( Inc / Dec ), unemployment ( Inc / Dec ), and prices
to ( Inc / Dec ). This economy would be described as undergoing a ( Recession /
Expansion ).
10. For all of the above, what happens in the long run?
Income returns to the long run equilibrium or “full employment” levels. And the
unemployment rate returns to the natural rate of unemployment.