Macroeconomics - From Short Run to Long Run

These flashcards cover key concepts from the macroeconomics chapter on the adjustment of factor prices and the transition from the short run to the long run.

What are the assumptions of the short run in macroeconomics?

Factor prices are assumed to be exogenous; technology and factor supplies are constant.

How do factor prices adjust in response to output gaps?

Factor prices are assumed to adjust in response to output gaps affecting firms' costs.

What happens when output is above potential (Y > Y*)?

There is excess demand for factor inputs, leading to upward pressure on wages.

What is the typical response of wages during a recession (Y < Y*)?

Wages tend to fall slowly due to excess supply of labor and below-normal sales.

What is the Phillips curve about?

It describes the negative relationship between unemployment and wage changes.

What does potential output act as in the economy?

Potential output acts like an 'anchor' that the economy returns to after shocks.

What are automatic fiscal stabilizers?

Tax and transfer systems that reduce the multiplier effect and stabilize GDP.

What are the limitations of discretionary fiscal policy?

It faces issues such as decision and execution lags, and the effects of temporary versus permanent tax changes.

What does long-run equilibrium in macroeconomics mean?

It is the state when real GDP returns to potential output (Y*) and there is no output gap.

How does an increase in saving affect potential output in the long run?

In the long run, increased saving leads to increased investment, thereby raising potential output.