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part IV
Business Cycle Theory:
The Economy in
the Short Run
User JOEWA:Job EFF01425:6264_ch09:Pg 237:27129#/eps at 100% *27129* Wed, Feb 13, 2002 10:07 AM
CHAPTER NINE
Introduction9 to Economic Fluctuations
The modern world regards business cycles much as the ancient Egyptians
regarded the overflowing of the phenomenon recurs at intervals, it
is of great importance to everyone, and natural causes of it are not in sight.
— John Bates Clark, 1898
Economic fluctuations present a recurring problem for economists and policy-
makers. This problem is illustrated in Figure 9-1, which shows growth in real
GDP for the . you can see, although the economy experiences
long-run growth that averages about percent per year, this growth is not at all
steady. Recessions—periods of falling es and rising unemployment—are
frequent. In the recession of 1990, for instance, real GDP fell percent from its
peak to its trough, and the unemployment rate rose to percent. During reces-
sions, not only are more people unemployed, but those who are employed have
shorter workweeks, as more workers have to accept part-time jobs and fewer
workers have the opportunity to work overtime. When recessions end and the
economy enters a boom, these effects work in reverse: es rise, unemploy-
ment falls, and workweeks expand.
Economists call these short-run fluctuations in output and employment the
business cycle. Although this term suggests that economic fluctuations are regular
and predictable, they are not. Recessions are as irregular as they mon.
Sometimes they are close together, such as the recessions of 1980 and 1982.
Sometimes they are far apart, such as the recessions of 1982 and 1990.
In Parts II and III of this book, we developed theories to explain how the
economy behaves in the long run. Those theories were based