9.1 Three Macroeconomic States Flashcards
Review of Potential GDP
What are the assumptions we make about the macro model in the short-run?
- Factor prices are assumed to be exogenous; they may change, but any change is not explained within the model.
- Technology and factor supplies are assumed to be constant (and therefore is constant).
What is short-run macroeconomic equillibrium determined by?
the short-run macroeconomic equilibrium is determined by the intersection of the AD and AS curves, both of which are subject to shocks of various kinds.
What to various shocks do to the level of real GDP?
These shocks cause the level of real GDP to fluctuate around a constant level of potential output
In this chapter we analyze the adjustment process that takes the economy from the short run to the long run. What are they?
Factor prices are assumed to adjust in response to output gaps.
Technology and factor supplies are assumed to be constant (and therefore is constant).
What common assumption do we make about the adjustment process from short-run to long-run?
Note that, as in the short-run version of the model, the adjustment process is assumed to take place with a constant level of potential output.
What is our emphasis on the macroeconomic adjustment process useful for?
Our emphasis on the macroeconomic adjustment process is especially useful for examining how the effects of policies differ in the short and long runs
In Chapter 10 we will examine our macro model in the long run and focus on the process of economic growth. The assumptions of the model in the long run are:
Factor prices are assumed to have fully adjusted to any output gap.
(The first assumption tells us that, after factor prices have fully adjusted, real GDP will return to the level of potential output. )
Technology and factor supplies are assumed to be changing (and typically growing).
(The second assumption implies that the level of potential output is typically growing)
Instead of shirt-term fluctuations, what does the long-run version of our macroeconomic model focus on?
In the long-run version of our macroeconomic model, our focus is not on the nature of short-run fluctuations in GDP but rather on the nature of economic growth—where technological change and the growth of factor supplies play key roles.
The economy is probably never “in” the long run in the sense that factor prices have fully adjusted to all AD and AS shocks. Why?
This is because such shocks are not isolated events but instead events that occur more or less continually. So, before the full adjustment to one shock is complete, another shock occurs and sets the adjustment process in motion again.
Table of the three economic states
In conclusion, what do we see and assume?
In this chapter we will see how this adjustment process takes the economy from its short-run equilibrium to its long-run equilibrium. To repeat, we assume in this chapter that factor prices adjust in response to output gaps and that potential output is constant.
