Chapter 25

Chapter 25 - Chapter 25: The Difference Between Short-Run...

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Chapter 25: The Difference Between Short-Run and Long-Run Macroeconomics Distinctions between short-run GDP fluctuations and long-run GDP growth 25.1 Two Examples Macroeconomics variables behave differently over the short run than over the long run. Inflation and Interest Rates in Canada: a monetary policy designed to reduce inflation and nominal interest rates in the long run requires an increase in interest rates in the short run. o Inflation erodes the value of money: lenders need to be compensated for the inflation- induced fall in the real value of their money between the time they lend it and the time that they are repaid. This requires charging a nominal interest rate high enough to cover the effects of inflation o Higher inflation pushes up interest rates; lower inflation pushes them down o As wage growth declines the pressure on prices to rise also declines o As inflation falls, and the rate of erosion of money’s value falls with it, nominal interest rates will also fall. Saving and Growth in Japan : An increase in households’ or firms’ saving rates will reduce the level of output in the short run, but it will increase output in the long run. o In the short run, with factor prices and technology more or less constant, an increase in households’ desire to save, perhaps caused by some uncertainty about future economic events, implies a reduction in expenditure, which leads to a reduction in output (through the usual multiplier process) AD curve shifts to the left and real GDP falls In the short run, there is some adjustment of output and employment, but little adjustment of wages
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Chapter 25 - Chapter 25: The Difference Between Short-Run...

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