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Short Run Theory Explained

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Short Run Theory Explained

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  • Feb. 13, 2013
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Macro-Economics
MBA 520

Read the September 27, 2012 Washington Post article “Why a bull run for business investment may be over” by Neil Irwin (http”//www.washingtonpost.com/business/economy). Use the SR theory of the business cycle to explain Irwin’s premise and conclusions about the direction of the US macro economy. Be certain your narrative includes a. a description of the SR theory, (20 pts)

b. an analysis of how the level of investment spending is determined, why it has changed in the last four years, how it contributed to the recovery to date and may contribute in the next year and (50 pts)

The article “why a bull run for business investment may be over” is about how businesses aren’t investing enough or as much as they use to. It appears businesses are not investing enough due to the economic expansion which began in mid 2009. Even though business spending increased from 2010 to 2011, “the rate of growth in such spending has fallen in each of the past three quarters, and it rose at only a 4.8 percent annual rate in the April-June period”. Consumer spending, government spending and housing also went down because of the expansion. Based on this information I will be using the short run theory of the business cycle to explain Irwin’s premise and conclusions about the direction of the US macro economy then have a graphical explanation. The Short Run Theory model is used to determine real GDP. Our main concern is to minimize fluctuations in the unemployment and inflation rates; this requires that fluctuation in real GDP be minimized. Therefore full employment and external balance are required to minimize the business cycle. Profitability depends upon the economic stability within which to make decisions or at a minimum, the ability to track economic development that has an impact on profits. This theory involves ex post data, which is considered after the fact data. Output is equal to expenditures or GDP; where GDP is equal to the sum of...