CH 25 - Short-Run + Long-Run Macroeconomics

CH 25 - Short-Run + Long-Run Macroeconomics - Short-Run...

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CHAPTER 25 SHORT-RUN + LONG-RUN MACROECONOMICS 25.1 TWO EXAMPLES Macroeconomic variables behave differently over the short run than over the long run. o Example = monetary policy designed to reduce inflation + nominal interest rates in the long run, requires an increase in interest rates in the short run. o Example = 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 In the short-run there is some adjustment of output + employment, but little adjustment of wages + prices. In the long-run , full adjustment of wages + prices is assumed to take place 25.2 ACCOUNTING FOR CHANGES IN GDP All changes in GDP can be accounted for by changes in one or more of the following 3 variables: o Supply of Factors o Factor Utilization Rates o Factor Productivity Long-Run changes in GDP are caused mostly by changes in: o Factor supplies + factor productivity. o Utilization rate of Factors does NOT change significantly over the long-run
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Unformatted text preview: Short-Run changes in GDP are caused mostly by changes in the factor utilization rate. o Factor Supplies + Productivity have minor short-run fluctuations 25.3 POLICY IMPLICATIONS When studying short-run fluctuations , economists focus on changes in the output gap and tend to ignore changes in potential output. When studying long-run fluctuation , economists focus on changes in potential output , and ignore changes in the output gap Fiscal + monetary policies affect GDP in the short-run because they affect the level of demand, and thus the position of the AD curve. Unless they are able to affect the level of potential output, they will have no long-run effect on GDP KEY CONCEPTS : Short-Run Fluctuations Long-Run Trends Changes in the Output Gap vs Changes in Potential Output Accounting for changes in GDP Factor Supplies Factor Utilization Rates Factor Productivity...
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This note was uploaded on 04/18/2008 for the course ECON 295 taught by Professor Ragan during the Spring '08 term at McGill.

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