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Unformatted text preview: 1 The Short Run Part 3: Chapter 9 An Introduction Introduction to the Short Run Charles I. Jones 9.1 Introduction In this chapter, we learn: How the gap between actual GDP and potential GDP is a key measure of the economy s performance in the short run. How costly fluctuations in economic activity can be. The relationship between output and inflation. A simple version of the short-run model that will help us understand these patterns. The long-run model is a guide to how the economy behaves on average. At any given time the economy is unlikely At any given time, the economy is unlikely to exactly equal the long-run average. 9.2 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. 9.2 The Long Run, the Short Run, and Shocks Potential output The amount the economy would produce if all inputs were utilized at their long-run sustainable levels 2 In the short-run model The current level of output and the current inflation rate are endogenous . Current output may deviate from potential output because of economic shocks. In the short-run model: We assume that the long run is a given. Potential output and the long-run inflation t rate are exogenous Trends and Fluctuations Output is equal to the long-run trend plus short-run fluctuations: The long-run trend is potential output. The short-run fluctuations are the percentage change of deviations from potential GDP. Short-run fluctuation The difference in actual and potential output, expressed as a percentage of potential output Referred to as detrended output or short-run output: Short-Run Output in the United States Fluctuations in U.S. GDP: Are relatively hard to see when graphed over a...
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This note was uploaded on 08/23/2011 for the course ECON 3203 taught by Professor Robertpennington during the Summer '11 term at University of Central Florida.
- Summer '11