4. a Variable That Moves in the Same Direction As Aggregate Economic Activity Is Said To

Chapter 8

4. A variable that moves in the same direction as aggregate economic activity is said to be procyclical, while a variable that moves in the opposite direction is countercyclical. If the peaks and troughs of a variable occur before the peaks and troughs in aggregate economic activity, it is said to be a leading variable. If a variable’s peaks and troughs occur at the same time as the peaks and troughs in aggregate economic activity, it is said to be a coincident variable. If a variable’s peaks and troughs come after the peaks and troughs of aggregate economic activity, it is said to be a lagging variable.

8. Keynesians and classicals differ sharply in their beliefs about how long it takes the economy to reach a long-run equilibrium. Classical economists believe that prices adjust rapidly (within a few months) to restore equilibrium in the face of a shock, while Keynesians believe that prices adjust slowly, taking perhaps several years.

Because of the time it takes for the economy’s equilibrium to be restored, Keynesians see an important role for the government in fighting recessions. But because classicals believe that equilibrium is restored quickly, there’s no need for government policy to fight recessions.

Since classicals think equilibrium is restored quickly in the face of shocks, aggregate demand shocks can’t cause recessions, since they can’t affect output for very long. So classical economists think recessions are caused by aggregate supply shocks. Keynesians, however, think that both aggregate demand and aggregate supply shocks are capable of causing recessions.