Ch14-AK

1a) The last recession lasted from March 2001 to November 2001 (8 months).

1b) The longest recession was NOT the Great Depression. The longest recession last 65 months between October 1873 and March 1879 (called “The Long Depression”). The longest expansion was the 120 month (ten year) period between March 1991 and March 2001.

1c) The shortest business cycle (Trough to Trough) lasted just 28 months from July 1980 to November 1982. The longest lasted 128 months from March 1991 to November 2001.

2) The easiest way to answer this question is to create a column in Excel for “Change in GDP,” and then identify recessions as periods in which GDP declined for two or more consecutive quarters (although, six or more consecutive months is a better way to identify recessions). See Ch14-AK.xls.

3) In the Short Run, AS_SR shifts right (to AS¹_SR), output rises above potential (Y > Y^*), the price level falls, and employment increases. The economy cannot operate at this level forever. The economy “overheats”, workers demand higher wages, and firms pass these increased costs along to consumers. Eventually, the economy (the AS_SR curve, output, price level, employment, etc.) returns to its initial position at full employment (or potential). (See the book’s discussion about the wage-price spiral).

4a) In the short-run, firms can respond to increases in demand. The short-run AS curve is relatively flat, because prices are sticky. But firms may have to charge higher prices as they supply more output if the average costs of production rise as a result of this expansion.

4b) AD is negatively sloped because if prices are low, the purchasing power of money is high. People who hold money will feel wealthier, and will want to spend more (wealth effect). Also, a low price level means that domestic goods are cheap, and foreigners will want to buy them. NX and GDP are high as a result (international trade effect).