Transcript Short-Run vs. Long-Run

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Short-Run
No time for
economy to make
adjustments
Nominal wages
remain fixed as
price level changes
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Long-Run
Economy has
sufficient time to
make adjustments
Nominal wages are
responsive to price
level changes
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Demand-pull inflation increases AD, PL
increases, output increases….
If PL increases, workers real wages decrease,
causes unrest
Workers receive increase in nominal wages to
increase purchasing power…
Causes SRAS to shift left…..
Cycle repeats over time…..
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Recessionary Gaps
The amount by which
agg. Expenditures at
the full-employment
GDP fall short of
those required to
achieve full
employment GDP
Recessions shift AD
left
Where would this be
on a graph?
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Inflationary gaps
The amount by which
agg. Expenditures at
full-employment GDP
exceed those
necessary to achieve
full-employment
GDP.
Inflation shifts AD
right
Where would this be
on a graph?
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If AD shifts right due to cost-push inflation,
what happens to PL and unemployment?
Price level increases, but unemployment
decreases
Generalization – there is an inverse
relationship between inflation and
unemployment
The dude that came up with this idea is A.W.
Phillips…so we call this the Phillips curve
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This explains a basic theory of
macroeconomics….output creates jobs, but
comes at a price….an increased
price….hahaha
Get it?
Do ya?
Seriously, do you get it?
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Refutes the Phillips curve generalization
Increasing PL and Unemployment rate
Due to shock (unexpected) to AS
determinants such as increases in resource
costs…
Example – OPEC during the 1970’s….
Enough
Said….
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Proponents believe that changes in AS must
be recognized as active forces in determining
the levels of both inflation and
unemployment.
As adverse conditions arise, the government
can manipulate AS to reduce these problems.
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Lower taxes to increase incentive to work
◦ Reductions in marginal tax rates increase the
nation’s aggregate supply.
◦ And, this reduction could possibly lead to increased
tax revenue (Arthur Laffer)
◦ Exhibited by Laffer curve
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Reduce public transfer programs that
diminish the crisis of being unemployed.
Reduce government regulation
Increase incentives to save and invest
◦ Mostly done by lowering marginal tax rates