Macroeconomics: Three Models Overview

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What shape does the AS curve take in the long run?

Vertical (correct)

U-shaped

Flat

Horizontal

Which factor primarily determines output in the long run?

Inflation Rate

Productive Capacity (correct)

Aggregate Demand

Price Level

What leads to changes in output in the short run?

Changes in interest rates

Changes in the money supply

Changes in Aggregate Demand (correct)

Changes in the supply side

What is the relationship between AD and unemployment in the short run?

AD determines output, thus affecting unemployment Signup and view all the answers

Which statement is true regarding inflation in the long run?

High rates of inflation are due to changes in AD Signup and view all the answers

What happens to the AS curve when aggregate demand pushes output above the sustainable level?

The AS curve adjusts with an increase in prices. Signup and view all the answers

How is the Phillips curve significant in understanding the economy?

It illustrates the trade-off between inflation and unemployment. Signup and view all the answers

What primarily drives short-run changes in prices and output according to the AS curve?

Movements in aggregate demand. Signup and view all the answers

What factor contributes to growth in GDP?

Increases in available resources such as labor and capital. Signup and view all the answers

Which statement about economic growth is true?

Developed economies generally grow at a rate of a few percentage points per year. Signup and view all the answers

What does the output gap measure?

The difference between actual output and potential output Signup and view all the answers

How is the inflation rate estimated?

By the percentage change in the consumer price index (CPI) Signup and view all the answers

What characterizes periods of economic growth when driven by aggregate demand (AD)?

Increases in prices and inflation Signup and view all the answers

What indicates potential output in an economy?

The path GDP would take if resources were fully utilized Signup and view all the answers

What is a result of periods of contraction in an economy?

Reduction in prices and negative inflation rates Signup and view all the answers

What is the primary focus of macroeconomics?

Behavior of the economy as a whole Signup and view all the answers

Which model is primarily concerned with understanding changes in output and unemployment due to shifts in aggregate demand?

Short Run Model Signup and view all the answers

In the context of macroeconomics, what does the term 'very long run' refer to?

Growth theory focused on production capacity Signup and view all the answers

How does the Long Run Model primarily determine potential output?

Based on fixed levels of capital and technology Signup and view all the answers

What does macroeconomics utilize to measure the performance of an economy?

Output levels, unemployment rates, and inflation Signup and view all the answers

Which of the following best defines the relationship between macroeconomics and microeconomics?

Macroeconomics aggregates the market behavior, while microeconomics focuses on individual units. Signup and view all the answers

What is a key determinant of future economic growth according to growth theory?

Rate of saving Signup and view all the answers

In macroeconomics, what does the short run refer to in terms of pricing and output?

Prices are fixed, but output is variable. Signup and view all the answers

Study Notes

Macroeconomics

Study of the economy as a whole and government policies that influence it
Focuses on total output, unemployment, inflation and exchange rates
Examines the economy in the short and long run
- Short run: fluctuations in the business cycle
- Long run: economic growth

Macroeconomics in Three Models

Macroeconomics uses three models to explain economic activity: very long run, long run and short run
- Very Long Run: Domain of growth theory, focuses on growth of the economy's production capacity
- Long Run: A snapshot of the very long run model with fixed capital & technology, determining the level of potential output; prices are determined by changes in Aggregate demand (AD)
- Short Run: Business cycle theories, changes in AD determine how much of the economy's productive capacity is used, output and unemployment; prices are fixed

Very Long Run Growth

US income per person has grown at 2-3% per year over the last century
Growth theory examines how increases in inputs and technology lead to higher living standards
Saving is a significant factor in future well-being and economic growth

The Long Run Model

In the long run, the aggregate supply (AS) curve is vertical and pegged at the potential level of output
- Output is determined by the supply side of the economy and its productive capacity
- Price level is determined by demand relative to productive capacity
High inflation rates in the long run are caused by changes in AD

The Short Run Model

Short run fluctuations in output are largely due to changes in AD
- The AS curve in the short run is flat because prices are fixed, changes in output are driven by changes in AD
Changes in AD in the short run create phases of the business cycle
- AD determines output and thus unemployment

The Medium Run

The medium run AS curve slopes upwards toward the long run AS curve position
As AD drives output above the sustainable level, firms increase prices
With increasing prices, the AS curve is no longer pegged at a particular price level

The Phillips Curve

Prices adjust slowly, allowing AD to temporarily drive the economy
The Phillips curve shows the relationship between inflation and unemployment
- In the short run, the AS curve is relatively flat, and changes in AD influence prices, output, and unemployment

Growth and GDP

The growth rate of the economy is the rate at which GDP increases
- Most developed economies grow at a few percentage points per year
- The average US real GDP growth was 3.4% per year between 1960 and 2005
GDP growth is driven by:
- Increased available resources (labor and capital)
- Increased productivity of resources

The Business Cycle and the Output Gap

The pattern of expansion and contraction in economic activity around the trend growth path is the business cycle
- The trend path of GDP is the path GDP would follow with full utilization of factors of production
The difference between actual and potential output is the output gap
- Output gap = actual output - potential output
- It measures cyclical deviations of output from the potential level

Inflation and the Business Cycle

The consumer price index (CPI) measures inflation
- CPI calculates the cost of a typical household's basket of goods
Economic growth driven by AD results in increased prices and inflation during expansion phases
Economic contraction is associated with lower prices and negative inflation rates.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz explores the fundamental concepts of macroeconomics, including the study of the economy as a whole and government policies. It covers the short run, long run, and very long run models that explain economic activity and fluctuations in the business cycle. Test your understanding of these essential economic principles!