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CHAPTER 10
ECONOMIC FLUCTUATIONS
MASTERY GOALS
The objectives of this chapter are to:
THE CHAPTER IN A NUTSHELL
Actual GDP fluctuates above and below the classical model’s predictions. GDP rises in an
The classical model cannot explain why economic fluctuations occur because it assumes that
Booms and recessions are periods during which the economy deviates from the normal,
A sudden change in spending can push the economy away from equilibrium. An increase in
Because spending changes can cause the economy to depart from the classical equilibrium, the
In order presented in chapter.
Boom: A period of time during which real GDP is above potential GDP.
Slump: A period during which real GDP is below potential and/or the employment rate is below
normal.
TEACHING TIPS
1. Explain that forecasters use an index of ten leading economic indicators to predict what
will happen to GDP. Collection of this information, which was done by the U.S.
Department of Commerce, was privatized in 1995 and is performed by The Conference
Board, a private business research organization. To view the Conference Board’s latest
e .
2. The major emphasis of this chapter is on explaining why booms and recessions occur.
The classical model cannot explain booms and recessions because it assumes that markets
respond very quickly to changes in spending so that the economy remains at full
employment. The alternative view (which, as students will find in the next chapter, is the
DISCUSSION STARTERS
1. Have students use their understanding of the two theories of adjustment speed presented
in the chapter (classical and short-run macro) to predict how advocates of these theories
will differ in their advocacy of government intervention in the economy.
b. Use the alternate view that adjustment occurs slowly to explain why many of its
