Samuelson's book Summary Chapter 23

Chapter 23 Summary

A. Business Fluctuations 1. Business cycles or fluctuations are swings in total national output, income, and employment, marked by widespread expansion or contraction in many sectors of the economy. They occur in all advanced market economies. We distinguish the phases of expansion, peak, recession, and trough. 2. Many business cycles occur when shifts in aggregate demand cause sharp changes in output, employment, and prices. Aggregate demand shifts when changes in spending by consumers, businesses, or governments change total spending relative to the economy's productive capacity. A decline in aggregate demand leads to recessions or depressions. An upturn in economic activity can lead to inflation. 3. Business-cycle theories differ in their emphasis on exogenous and internal factors. Importance is often attached to fluctuations in such exogenous factors as technology, elections, wars, exchange-rate movements, or oil-price shocks. Most theories emphasize that these exogenous shocks interact with internal mechanisms, such as the multiplier and investment-demand shifts, to produce cyclical behavior. Just as people suffer from different diseases, so do business-cycle ailments vary in different times and countries. B. Foundations of Aggregate Demand 4. Ancient societies suffered when harvest failures produced famines. The modern market economy can suffer from poverty amidst plenty when insufficient aggregate demand leads to deteriorating business conditions and soaring unemployment. At other times, excessive reliance on the monetary printing press leads to runaway inflation. Understanding the forces that affect aggregate demand, including government fiscal and monetary policies, can help economists and policymakers design steps to smooth out the cycle of boom and bust. 5. Aggregate demand represents the total quantity of output willingly bought at a given price level, other things held constant. Components of spending include (a) consumption, which depends primarily upon disposable income; (b) investment, which depends upon present and expected future output and upon interest rates and taxes; (c) government purchases of goods and services; and (d) net exports, which depend upon foreign and domestic outputs and prices and upon foreign exchange rates. 6. Aggregate demand curves differ from demand curves used in microeconomic analysis. The AD curves relate overall spending on all components of output to the overall price level, with policy and exogenous variables held constant. The aggregate demand curve is downward_sloping primarily because of the money-supply effect, which occurs when a rise in the price level, with the nominal money supply constant, reduces the real money supply. A lower real money supply raises interest rates, tightens credit, and reduces total real spending. This represents a movement along an unchanged AD curve. 7. Factors that change aggregate demand include (a) macroeconomic policies, such as monetary and fiscal policies, and (b) exogenous variables, such as foreign economic activity, technological advances, and shifts in asset markets. When these variables change, they shift the AD curve.