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chapter 25 from the short run to the long run

chapter 25 from the short run to the long run - CHAPTER 25...

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CHAPTER 25 From the Short Run to the Long Run
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Chapter Twenty-Five 2 of 20 Lecture Outline 1. The short run in macroeconomics 2. The long run in macroeconomics 3. How wages and prices adjust from the short run to the long run 4. How the economy returns to its full-employment output level when it deviates from it 5. How policy-makers can use macroeconomic policy to accelerate the economy’s adjustment back to its full-employment output level 6. Limitations of macroeconomic policy to stabilise the economy 7. How money demand, interest rates and investment change during the economy’s return to its full-employment output level 8. The impact of increases in the money supply on the economy 9. The crowding out effect of increased government spending FYR
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Chapter Twenty-Five 3 of 20 The Difference Between the Short and Long Run In the short run: Wages and prices are sticky. The level of GDP is determined by the current demand for goods and services.
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Chapter Twenty-Five 4 of 20 In the long run: Prices are flexible. The level of GDP is determined by the demand and supply of labour, the stock of capital and technological progress. The economy operates at full employment.
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Chapter Twenty-Five 5 of 20 Should economic policy be guided by what is expected to happen in the short run, as Keynes thought, or what is expected to happen in the long run, as Friedman thought? To answer this question, we need to know two things: 1. How does what happens in the short run determine what happens in the long run? 2. How long is the short run?
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Chapter Twenty-Five 6 of 20 Wages and Prices and  Their Adjustment over Time Wage-price spiral The process by which rising wages cause higher prices and higher prices feed higher wages.
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Chapter Twenty-Five 7 of 20 A wage-price spiral occurs when actual output produced exceeds the potential output of the economy.
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