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Canada (161,372)
Economics (385)
ECO100Y5 (290)
Michael H O (131)
Chapter 25

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Michael H O

Chapter 25 - difference between short-run and long-run macroeconomics. 7 of 13 2 of 13 3 of 13 25.2  Accounting for Changes in GDP 25.1  Two Examples from  The key to this puzzle: Recent History - recognize the different short-run and long-run effects GDP Accounting: The Basic Principle of monetary policy Inflation and Interest Rates in Canada Consider the following identity: Ceteris paribus, an increase in inflation pushes up noIn the short run, the rise in interest rates causes aggregate GDP = F x (F /F) x (GDP/F ) interest rates. expenditure to fall, reducing output. E E • F is the amount of factors The Bank of Canada argues that: in order toreduceinflation • E is the amount of employed factors. and interest rates, the Bank must take actions whichraise the interest rate immediately. But in the long run, the downward pressure on wages (recessionary gap) causes inflation to fall, and interest rates What are the three separate terms? How can this be sensible? too. Copyright© 2011 Pearson Canada Inc. Cop yright © 2011 Pearson Canada Inc. Copyright © 2011 Pearson Canada Inc. 5 of 13 4 of 13 6 of 13 Saving and Growth in Japan In the short run, an increase in desired saving leads to less aggregate desired spending  economic slump. A Need to Think Differently For the decade following 1990, Japan’s economy was stagnant. Some argue there was too much saving (and too Short run: little spending). - emphasize changes in output as deviations from potential But in the long run, greater saving expands the pool of fund- limited price and wage adjustment Many also argue that Japan’s economic success since drives down interest rates, and makes investment more World War II was due in part to its high saving rate. attractive. Long run: - emphasize changes in output as changes of potential How can both views be correct? - recognize the different short-run and long-run More investment in capital leads to increases in the economy’sconsiderable wage and price adjustment takes place effects of saving long-run productive potential  economic growth. Copyright © 2011 Pearson Canada Inc. Copyright © 2011 Pearson Canada Inc. Copyright © 2011 Pearson Canada Inc. Accounting for changes in GDP. ON PAGE 626. • Potential GDP is the level of output that the economy produces when all factors of production are being utilized at their normal rates. The value of potential GDP is estimated by combining three pieces of information: the amounts of available factors of production (such as the labour force and the capital stock); an estimate of these factors' normal rates of utilization; and an estimate of each factor's productivity. • When st
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