1Economics 102Lecture 23: Course ConclusionLECTURE 23COURSE CONCLUSION1In this lecture, look for the answers to these questions:❧What are the most important lessons we have learned about the workings of the macro economy?❧How does real business cycle theory explain economic fluctuations?❧What is the nature of the looming fiscal challenge due to Social Security and Medicare obligations?LECTURE 23COURSE CONCLUSION2Important Macro LessonsLesson 1: In the short run, changes in aggregate demand can influence the quantity of G&S a country produces but not in the long run . ❧Implications•Monetary and fiscal policy may be useful in affecting real output in the short run but will only change the price level (rate of inflation) in the long run .[Note: fiscal policy may have long-run effects on output if it changes the natural rate of output.]
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2LECTURE 23COURSE CONCLUSION3Important Macro LessonsLesson 2: In the long run, the quantity of G&S produced in a country is completely determined by .❧Implications:•A country’s standard of living depends on its ability to .•Policies intended to improve economic growth and living standards must focus on aggregate supply .•Preconditions for growth focus on institutions that encourage the ability to produce G&S.LECTURE 23COURSE CONCLUSION4Important Macro LessonsLesson 3: In the short run, policymakers who control monetary and fiscal policy face a tradeoff between inflation and unemployment .❧Implications•It is costly to reduce the rate of inflation. [An argument for never allowing a high rate of inflation in the first place.]LECTURE 23COURSE CONCLUSION5Important Macro LessonsLesson 4: In the long run, the rate of growth of the money supply determines the rate of inflation but does not affect real output or the unemployment rate.❧Implications•The central bank is responsible for the rate of inflation in the long run.