Notesale: Turn your study into money

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REALBUSI
NESSCYCLEMODEL
Thedomi
nantnewcl
assi
calt
heor
yoft
hebusi
nesscy
cl
edur
i
ngt
heper
i
od
1972–82wast
hemonet
ar
ysur
pr
i
semodeli
ni
t
i
al
l
ydev
el
opedbyLucas(
1975,
1977)

...
Thet
r
ansi
t
i
onf
r
om
monet
ar
yt
or
ealt
heor
i
esoft
hebusi
nesscy
cl
ewasst
i
mul
at
edbyt
woi
mpor
t
ant
dev
el
opment
s
...

Second,t
her
ealshocksmaybef
armor
ei
mpor
t
antt
hanmonet
ar
yshocksi
n
ex
pl
ai
ni
ngt
hepat
hofaggr
egat
eout
putov
ert
i
me
...

Ther
ealbusi
nesscy
cl
et
heor
yhasbeenev
ol
v
edoutoft
heAmer
i
cannew
cl
assi
calschoolof1980s
...
Realbusi
nesscy
cl
et
heor
yasser
t
st
hatt
hef
l
uct
uat
i
onsi
nout
putand
empl
oy
mentar
et
her
esul
tofav
ar
i
et
yofr
ealshocks
...
Real
busi
ness cy
cl
e t
heor
i
st
s di
st
i
ngui
sh bet
ween i
mpul
se and pr
opagat
i
on
mechani
sms
...
A pr
opagat
i
onmechani
sm consi
st
sof
t
hosef
or
ceswhi
chcar
r
yt
heef
f
ect
soft
heshockf
or
war
dt
hr
ought
i
meand
causet
hedev
i
at
i
onf
r
om t
hest
eadyst
at
et
oper
si
st

...
Economi
cagent
sl
i
ke/
househol
d/
f
i
r
m ai
mst
omaxi
mi
zet
hei
rut
i
l
i
t
yorpr
of
i
t
s,
subj
ectt
opr
ev
ai
l
i
ngr
esour
ceconst
r
ai
nt
s
...
Agent
sf
or
m expect
at
i
ons r
at
i
onal
l
y and do not suf
f
er i
nf
or
mat
i
onal
asy
mmet
r
i
es
...
Pr
i
cef
l
ex
i
bi
l
i
t
yensur
escont
i
nuousmar
ketcl
ear
i
ngsot
hatequi
l
i
br
i
um al
way
s
pr
ev
ai
l
s
...

4
...
Exogenous shocks t
o
t
echnol
ogyactast
hei
mpul
semechani
sm i
nt
hesemodel
s
...
Av
ar
i
et
yofpr
opagat
i
onmechani
smscar
r
yf
or
war
dt
hei
mpactoft
hei
ni
t
i
al
i
mpul
se
...
Fl
uct
uat
i
onsi
nempl
oy
mentr
ef
l
ectv
ol
unt
ar
ychangesi
nt
henumberofhour
s
peopl
e choose t
o wor
k
...

7
...

8
...

RBC t
heor
yi
s bui
l
ton t
he assumpt
i
on t
hatt
her
e ar
el
ar
ge r
andom
f
l
uct
uat
i
onsi
nt
her
at
eoft
echnol
ogi
calpr
ogr
ess
...
Rat
i
onali
ndi
v
i
dual
sr
espondt
ot
heal
t
er
edst
r
uct
ur
eofr
el
at
i
v
e
pr
i
cesbychangi
ngt
hei
rl
aboursuppl
yandconsumpt
i
onf
unct
i
on
...
Ont
hedemand
si
de,t
heshocksmayor
i
gi
nat
ef
r
om i
nst
abi
l
i
t
yi
nsomecomponentoft
heI
S
cur
v
e,asst
r
essedbyKey
nes
...
On
t
hesuppl
ysi
de,av
ar
i
et
yofshockswhi
chcoul
dr
esul
ti
nsi
gni
f
i
cantchangesi
n
pr
oduct
i
v
i
t
y
:
1
...
Thi
st
y
pe ofshock woul
di
ncl
ude nat
ur
al
di
sast
er
ssuchasear
t
hquakes,
dr
oughtandf
l
oods
...
Si
gni
f
i
cantchangesi
nt
hepr
i
ceofener
gy
,suchast
heoi
lpr
i
ce'
hi
kes'of
1973and1979andt
hesubsequentr
educt
i
oni
n1986
...
War
,pol
i
t
i
calupheav
al
,orl
abourunr
estwhi
ch di
sr
upt
st
he exi
st
i
ng
per
f
or
manceandst
r
uct
ur
eoft
heeconomy

...
Gov
er
nmentr
egul
at
i
ons,suchasi
mpor
tquot
as,whi
chdamagei
ncent
i
v
es
anddi
v
er
tent
r
epr
eneur
i
al
t
al
entt
owar
dsr
ent
seeki
ngact
i
v
i
t
i
es
...
Pr
oduct
i
v
i
t
yshocksgener
at
edbychangesi
nt
hequal
i
t
yoft
hecapi
t
aland
l
abouri
nput
s,new managementpr
act
i
ces,t
he dev
el
opmentofnew
pr
oduct
sandt
hei
nt
r
oduct
i
onofnewt
echni
quesofpr
oduct
i
on
...
Thi
scanexpectundernor
malci
r
cumst
ancest
obet
hedr
i
v
i
ngf
or
ceon
t
hesuppl
ysi
deov
ert
hel
ongert
er
mf
oradv
ancedi
ndust
r
i
al
economi
es
...
Thesesuppl
y
si
de
shockst
ot
hepr
oduct
i
onf
unct
i
ongener
at
ef
l
uct
uat
i
onsi
naggr
egat
eout
putand
empl
oy
ment

...

Somev
er
si
onsofr
ealbusi
nesscy
cl
et
heor
yal
l
owf
orr
ealdemandshocks,
suchaschangesi
npr
ef
er
encesorgov
er
nmentexpendi
t
ur
es,t
o actast
he
i
mpul
semechani
sm
...
Thesest
ochast
i
cf
l
uct
uat
i
onsi
nf
act
orpr
oduct
i
v
i
t
y
-ar
et
he
r
esul
tofl
ar
ge r
andom v
ar
i
at
i
onsi
nt
he r
at
e oft
echnol
ogi
calchange
...


4|

Theabov
ef
i
gur
ei
l
l
ust
r
at
ehowaggr
egat
eout
putandempl
oy
mentv
ar
yi
na
r
ealbusi
nesscy
cl
emodel

...

Thei
mpactoft
hi
sshi
f
tont
hemar
gi
nalpr
oductofl
abourandhencet
hedemand
f
orl
abouri
s shown i
n panel(
b)

...
Howmuchempl
oy
ment
ex
pandswi
l
ldependont
heel
ast
i
ci
t
yofl
aboursuppl
ywi
t
hr
espectt
ot
hecur
r
ent
r
ealwage
...
I
nt
hi
scaseat
echnol
ogyshockwi
l
l
causeout
putt
oexpandf
r
om y
oY2 wi
t
ht
her
ealwagei
ncr
easi
ngf
r
om (
W/
P)
0t
a
t
o(
W/
P)
andempl
oy
menti
ncr
easi
ngf
r
om L0t
oL2
...

LABOURMARKETI
NRBCMODEL
Thedi
scussi
onoft
hel
abormar
keti
nRBCf
ocusesonempl
oy
ment
,not
unempl
oy
ment

...
Anyqual
i
f
i
edper
sonwhowant
st
owor
kcangetaj
obatt
he
mar
ketwage
...
Whent
her
eal
wagedecr
eases,
peopl
esubst
i
t
ut
el
ei
sur
ef
orgoods
...
Labourmar
ket
sdet
er
mi
neempl
oy
mentandr
ealwage
...
I
ft
ot
alpr
oduct
i
v
i
t
ydecr
easesduet
onegat
i
v
esuppl
y
shocks,
t
her
ei
saf
al
li
nmar
gi
nalpr
oduct
i
v
i
t
yofl
abour

...
Thedr
opi
nl
abourdemandcr
eat
esexcesssuppl
yofl
abour–
r
ealwagesf
al
landempl
oy
mentdecr
eases
...


6|

Thet
opf
r
amei
nt
heFi
gur
e,exhi
bi
t
st
hepr
oduct
i
onf
unct
i
on(
F)
,whi
ch
showshowmuchout
putcanbepr
oducedbyeachaddi
t
i
onalwor
ker

...

I
nt
hel
owerf
r
ameoft
heFi
gur
e,
t
hel
abordemandcur
v
eNd,
whi
chshows
t
hemar
gi
nalpr
oductofl
abor
,shi
f
t
sdowni
nr
esponset
ot
headv
er
sesuppl
y
shockf
r
om t
hel
i
nel
abel
edNd0 t
ot
hel
i
neNd 1
...
Si
ncet
heeconomyi
sal
way
si
nequi
l
i
br
i
um i
nt
he
7|

RBCmodel
,t
hedemandf
orl
aborshi
f
t
sasar
esul
toft
hesuppl
yshockf
r
om
poi
ntBt
opoi
ntV
...

LABORSUPPLYBEHAVI
ORANDI
NTERTEMPORALSUBSTI
TUTI
ON
Accor
di
ngt
or
ealbusi
nesscy
cl
et
heor
i
st
s,
t
hel
ar
ger
esponseoft
hel
abour
suppl
yt
o smal
lchangesi
nt
her
ealwage,r
esul
t
i
ng f
r
om t
hei
nt
er
t
empor
al
subst
i
t
ut
i
on ofl
abour
,act
s as a power
f
ulpr
opagat
i
on mechani
sm
...
I
nt
er
t
empor
al
subst
i
t
ut
i
onofl
abourst
at
est
hathousehol
dsshi
f
tt
hei
rl
aboursuppl
yov
ert
i
me,
bei
ngmor
ewi
l
l
i
ngt
owor
kwhenr
ealwagesar
et
empor
ar
i
l
yhi
ghandwor
ki
ng
f
ewerhour
swhenr
eal
wagesar
et
empor
ar
i
l
yl
ow
...
I
ti
snecessar
yt
oconsi
dert
hev
ar
i
ousf
act
or
swhi
ch
i
nf
l
uencet
heamountofl
abouri
ndi
v
i
dual
schooset
osuppl
y

...
I
nor
dert
o ear
ni
ncome,
wor
ker
swi
l
lneedt
oal
l
ocat
el
essoft
hei
rt
i
met
ol
ei
sur
e
...

Buti
nmaki
ngt
hei
rl
aboursuppl
ydeci
si
onswor
ker
swi
l
lconsi
derf
ut
ur
easwel
l
ascur
r
entconsumpt
i
onandl
ei
sur
e
...

Thesubst
i
t
ut
i
onef
f
ectofahi
gherr
ealwageof
f
erwi
l
lt
endt
oi
ncr
easet
he
quant
i
t
yofl
aboursuppl
i
ed
...
Thi
sweal
t
hor
8|

i
ncomeef
f
ectwor
ksi
nt
heopposi
t
edi
r
ect
i
ont
ot
hesubst
i
t
ut
i
onef
f
ect

...
Realbusi
ness
cy
cl
et
heor
i
st
sdi
st
i
ngui
shbet
weenper
manentandt
empor
ar
ychangesi
nt
her
eal
wagei
nor
dert
oanal
y
sehowr
at
i
onalmax
i
mi
zi
ngi
ndi
v
i
dual
sr
espondov
ert
i
me
t
o changes i
nt
hei
reconomi
c ci
r
cumst
ances t
hatar
e br
oughtaboutby
t
echnol
ogi
cal
shocks
...

Fi
r
st
,i
fat
echnol
ogi
calshocki
st
r
ansi
t
or
y
,sot
hatt
hecur
r
entabov
enor
malr
ealwageof
f
er
sar
et
empor
ar
y
,wor
ker
swi
l
l‘
makehaywhi
l
et
hesun
shi
nes’andsubst
i
t
ut
ewor
kf
orcur
r
entl
ei
sur
e
...
Ther
ef
or
er
ealbusi
nesscy
cl
et
heor
ypr
edi
ct
sal
ar
gesuppl
y
r
esponsef
r
om t
empor
ar
ychangesi
nt
her
ealwage
...

Second,
somet
heor
i
st
shav
est
r
essedt
hei
mpor
t
anceofr
eali
nt
er
estr
at
es
onl
aboursuppl
yi
nf
l
exi
bl
epr
i
cemodel
s
...
Thi
s
ef
f
ectwoul
dshowupasashi
f
toft
hel
aboursuppl
ycur
v
et
ot
her
i
ght

...
Si
ncei
nt
hese
9|

model
si
ti
sassumedt
hatpr
i
cesandwagesar
ecompl
et
el
yf
l
exi
bl
e,t
hel
abour
mar
ket i
s al
way
si
n equi
l
i
br
i
um
...


10|



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