EC140 Chapter Notes - Chapter 25: Output Gap, Potential Output, Investment Goods
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Macroeconomic variables behave diferently over the short-run and over the long-run. One example: a monetary policy designed to reduce inlation and nominal interest rates in the long-run requires an increase in interest rates in the short-run. Another example: an increase in households" or irms" saving rates will reduce the level of output in the short-run, but it will increase output in the long-run. In the short-run, there is some adjustment of output and employment but little adjustment of wages and prices. In the long-run, full adjustment of wages and prices is assumed to take place. Short-run changes in gdp are shown mostly by changes in the output gap. Long-run changes in gdp are relected by changes in the level of potential. Any change in gdp can be decomposed into a change in factor supply, a change in factor utilization, and a change in productivity.
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