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Chapter 25

ECON 295 Chapter 25: Chapter 25 notes.docx

Course Code
ECON 295
Kenneth Ragan

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Chapter 25
The Difference between Short-Run and Long-Run Macroeconomics
I) Two Examples from Recent History
A) Inflation and Interest Rates in Canada
In the long run, we say that money is neutral, that is, changes in money supply have no long-run
effect on real variables, such as GDP, employment, and investment, but do have an effect on
nominal variables, such as the price level or inflation.
Changes in money supply do not change the level of potential output,
In the short run, we say that money is not neutral, as changes in money supply affect real
Monetary policy shifts the
curve and generate short-run changes in real GDP.
B) Saving and Growth in Japan
In the short run, national income is largely demand determined, meaning that changes in
demand will lead to changes in output in the same direction.
Increase in the desire to save = reduction in the desire to spend = less spending =
reduction in national income.
In the long run, economists say that national income is supply determined, meaning that
sustained increases in output will be possible only if the level of potential output increases.
Increases in output require either more factors of production or technological changes
that improve productivity.
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