ModernMacroeconomicsFromtheShortRuntotheLongRun.pptVIP

* of 24 Copyright ? 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 15 Modern Macroeconomics: From the Short Run to the Long Run * of 24 Copyright ? 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. Modern Macroeconomics:From the Short Run to theLong Run FERNANDO QUIJANO, YVONN QUIJANO, AND XIAO XUAN XU P R E P A R E D B Y They could not have differed more sharply on economic theory and policy. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. ● short run in macroeconomicsThe period of time in which prices do not change or do not change very much. LINKING THE SHORT RUN AND THELONG RUN 15.1 The Difference between the Short and Long Run ● long run in macroeconomicsThe period of time in which prices have fully adjusted to any economic changes. Should economic policy be guided by what we expect to happen in the short run, as Keynes thought, or what we expect to happen in the long run, as Friedman thought? To answer this question, we need to know two things: 1 How does what happens in the short run determine what happens in the long run? 2 How long is the short run? LINKING THE SHORT RUN AND THELONG RUN 15.1 Wages and Prices and Their Adjustment over Time ● wage–price spiralThe process by which changes in wages and prices cause further changes in wages and prices. HOW WAGE AND PRICE CHANGES MOVE THE ECONOMY NATURALLY BACK TO FULL EMPLOYMENT 15.2 ● aggregate demand curveA curve that shows the relationship between the level of prices and the quantity of real GDP demanded. Using aggregate demand and aggregate supply, we can illustrate graphically how changing prices and wages help move the economy from the short to the long run. 1 Aggregate demand. 2 Aggregate supply. ● short-run aggregate supply