4-SR Overview

4-SR Overview - ECO3311 Ch7:OverviewoftheShortRun...

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ECO 3311 Ch 7: Overview of the Short Run  
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Introduction In this chapter, we learn: how the gap between actual GDP and potential GDP —a gap we call short-run output—is a key measure of the economy’s performance in the short run how costly fluctuations in economic activity can be that the rate of inflation tends to decline when the economy is in a recession a simple version of the short-run model that will help us understand these patterns
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the long-run model is a guide to how the economy behaves on average. at any given time, the economy is unlikely to exactly equal the long-run average
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The Long Run, the Short Run, and  Shocks the long-run model determines potential output and long-run inflation the short-run model determines current output and current inflation potential output is the amount the economy would produce if all inputs were utilized at their long-run, sustainable levels
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output may deviate from potential output because the economy can be hit by shocks the short run is the length of time over which these shocks and deviations can occur. in short-run models, we assume that the long run is given (it is determined by the long-run model, which is outside of the short-run model) Potential output and the long-run inflation rate are exogenous
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the current level of output and the current inflation rate are endogenous in the short-run model Trends and Fluctuations output is equal to the long-run trend plus short-run fluctuations:
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the long-run trend is potential output the short-run fluctuations are the percentage change of deviations from potential GDP fluctuation is equal to the difference in actual and potential output, expressed as a percentage of potential output this short-run deviation, , is referred to as detrended output or short-run output:
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Short-Run Output in the United  States fluctuations in U.S. GDP are relatively hard to see when graphed over a long period of time The Great Depression was the large negative gap of the 1930s when actually output was well below potential a recession begins when actual output falls below potential, that is, when short-run output becomes negative a recession is over when short-run output starts to rise and become less negative
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This note was uploaded on 02/27/2011 for the course ECO 3311 taught by Professor Staff during the Spring '08 term at Texas Tech.

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4-SR Overview - ECO3311 Ch7:OverviewoftheShortRun...

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