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CHAPTER 24.docx

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Department
Economics (Arts)
Course
ECON 209
Professor
Paul Dickinson
Semester
Fall

Description
CHAPTER 24FROM THE SHORT RUN TO THE LONG RUN THE ADJUSTMENT OF FACTOR PRICES Learning objectivesWhy output gaps cause wages and other factor prices to changeHow induced changes in factor prices affect firms costs and shift the AS curveWhy real GDP gradually returns to potential output following AD or AS shockWhy lags and uncertainty place limitations on use of fiscal stabilization policyShort Run Defining characteristicsFactor prices are assumed to be exogenous they may change but any change is not explained within the modelTechnology and factor supplies are assumed to be constant thus Y constant Short runmacroeconomic equilibrium determined by intersection of AD and AS curvesReal GDP fluctuates around constant level of YUseful for short periods of time and to look at fluctuations of real GDP relative to Y business cyclesThe Adjustment of Factor Prices Adjustment process that takes economy from short run to long runFactor prices are assumed to adjust in response to output gapsTechnology and factor supplies are assumed to be constantY is constant Deviations of real GDP from Y cause wages and other factor prices to adjustThis adjustment is central to evolution from SR equilibrium to LR equilibriumAssuming Y is constant for simplicityThe Long Run Defining characteristicsFactor prices are assumed to have fully adjusted to any output gapTechnology and factor prices are assumed to be changing After factor prices have adjusted real GDP will return to YY is changing typically growingFocus not on business cycles but on nature of economic growthADAS shocks are continual IRL but LR model is usefulfor looking at increase in living standard for exSummary This chapter will look at how adjustment process takes economy from SR equilibrium to LR equilibriumAgain assumeFactor prices adjust in response to output gapsTechnology and factor supplies are constantY is constant241 THE ADJUSTMENT PROCESS Potential Output and the Output Gap Potential output output when all productive resources are being used at normal rates of utilization Output gap when actual output diverges from potential output In this chapter view variations in output gap as determined solely by variations in actual GDP around constant level of potential GDP
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