ANALYTICAL PROBLEMS
1. Figure 8.1 shows that business cycle peaks and troughs are identified with peaks and troughs in the level of aggregate economic activity, which is consistent with current NBER methodology.
However, for business cycles before 1927, the NBER identified business cycle peaks and troughs with peaks and troughs in detrended aggregate economic activity (aggregate economic activity minus the “normal growth path" shown in Fig. 8.1). Show that this alternative methodology implies that peaks occur earlier and that troughs occur later than you would find when using the current methodology. Compared to the current methodology, does the alternative methodology increase or decrease the computed length of contractions and expansions? How might this change in measurement account for the differences in the average measured lengths of expansions and contractions since World War II compared to the period before World War I?[149]2. Consumer expenditures on durable goods such as cars and furniture, as well as purchases of new houses, fall much more than expenditures on nondurable goods and services during most recessions. Why do you think that is?
3. Output, total hours worked, and average labor productivity all are procyclical.
a. Which variable, output or total hours worked, increases by a larger percentage in expansions and falls by a larger percentage in recessions? (Hint: Average labor productivity = output ÷ total hours worked, so that the percentage change in average labor productivity equals the percentage change in output minus the percentage change in total hours worked.)
b. How is the procyclical behavior of average labor productivity related to Okun's law, discussed in Chapter 3?
4. During the period 1973-1975, the United States experienced a deep recession with a simultaneous sharp rise in the price level. Would you conclude that the recession was the result of a supply shock or a demand shock? Illustrate, using AD-AS analysis.
5. It is sometimes argued that economic growth that is “too rapid" will be associated with inflation. Use AD-AS analysis to show how this statement might be true. When this claim is made, what type of shock is implicitly assumed to be hitting the economy?
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