325_Lecture11_Feb28

325_Lecture11_Feb28 - STEADY-STATE (LONG-RUN) OF...

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1 S TEADY- S TATE (L ONG- R UN ) OF I NFINITE- P ERIOD E CONOMY: W HY ARE I NTEREST R ATES P OSITIVE? F EBRUARY 28, 2011 February 28, 2011 2 AL ONG- R UN T HEORY OF M ACRO Modern Macro ± Aggregate economic activity tends to “settle down eventually” ± The “ups and downs” are business cycles ± The “average” is the long-run ± Technical terminology: steady-state ± Business-cycle analysis after midterm exam time Actual GDP (or virtually any real economic series…) Long-run GDP aka steady-state GDP aka potential GDP
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2 February 28, 2011 3 S TEADY S TATE Macro Fundamentals ± Steady state ± A concept from differential equations ± (Optimality conditions of economic models are differential equations…) ± Heuristic definition: in a dynamic (mathematical) system, a steady- state is a condition in which the variables that are moving over time settle down to constant values ± In dynamic macro models, a steady-state is a condition in which all real variables settle down to constant values
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325_Lecture11_Feb28 - STEADY-STATE (LONG-RUN) OF...

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