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💵principles of macroeconomics review

Short-Run Fluctuations

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Short-run fluctuations refer to the temporary deviations from the long-term trend in economic activity, such as changes in output, employment, and prices. These fluctuations are typically driven by factors that affect the demand and supply in the economy in the short term, and they can have significant impacts on the overall economic performance.

5 Must Know Facts For Your Next Test

  1. Short-run fluctuations are influenced by changes in aggregate demand, such as shifts in consumer spending, investment, government spending, and net exports.
  2. Factors that can cause short-run fluctuations in aggregate demand include changes in consumer confidence, interest rates, fiscal and monetary policies, and unexpected events like natural disasters or supply chain disruptions.
  3. In the short run, firms may be able to adjust their output levels and employment to meet changes in demand, but they are constrained by their existing production capacity and the rigidity of prices and wages.
  4. The Keynesian model emphasizes the role of aggregate demand in explaining short-run fluctuations, while the neoclassical model focuses on the role of aggregate supply and the flexibility of prices and wages.
  5. Policymakers often use fiscal and monetary policies to stabilize short-run fluctuations and promote economic growth and stability.

Review Questions

  • Explain how changes in aggregate demand can lead to short-run fluctuations in economic activity.
    • Changes in aggregate demand can cause short-run fluctuations in economic activity. For example, if consumer confidence declines, leading to a decrease in consumer spending, this will result in a decrease in aggregate demand. Firms may respond by reducing output and employment, leading to a contraction in economic activity. Conversely, an increase in aggregate demand, such as an increase in government spending, can lead to an expansion in economic activity in the short run as firms increase production to meet the higher demand.
  • Describe how the Keynesian and neoclassical models differ in their approach to explaining short-run fluctuations.
    • The Keynesian model emphasizes the role of aggregate demand in explaining short-run fluctuations, while the neoclassical model focuses on the role of aggregate supply and the flexibility of prices and wages. The Keynesian model suggests that changes in aggregate demand, such as shifts in consumer spending or investment, can lead to fluctuations in output and employment in the short run, as firms adjust their production to meet changes in demand. In contrast, the neoclassical model assumes that prices and wages are flexible, and that the economy will automatically adjust to its full-employment level of output in the short run, with any deviations from this level being temporary.
  • Evaluate the role of policymakers in stabilizing short-run fluctuations and promoting economic growth and stability.
    • Policymakers play a crucial role in stabilizing short-run fluctuations and promoting economic growth and stability. They can use fiscal and monetary policies to counteract the effects of changes in aggregate demand. For example, during an economic downturn, policymakers can implement expansionary fiscal policies, such as increasing government spending or cutting taxes, to boost aggregate demand and stimulate economic activity. Similarly, the central bank can use monetary policy, such as lowering interest rates, to increase the money supply and encourage investment and consumer spending. By actively managing aggregate demand, policymakers can help smooth out short-run fluctuations and promote a more stable and prosperous economic environment.