Eco 112

Topics: Gross domestic product, Economics, Macroeconomics Pages: 6 (1539 words) Published: July 24, 2013
1.Discuss short run, long run, and very long run analysis in macroeconomics

Macroeconomics consists of three realms: short run, long run, and the very long run. These are ways in which an analysis of the economy can be conducted with respect to time. Until today, the different types of national government policies are made based on these models of analysis.

short run graph

In the short run, firms cannot change the prices because there is a lack of time for the price to manifest in the market. If prices cannot change, then increasing amounts of labor hired without driving up the price. Graphically, the constant price is represented by the horizontal aggregate supply curve  and the demand is represented by the sloped aggregate demand curve. A shift in the aggregate demand curve would mean an increase in the hiring of workers and since prices cannot adjust in the short run, an increase in output of the economy is observed.

In the long run, firms have the ability to change prices because there is now enough time for prices and wages to adjust. The government now becomes ineffective in changing output because if it plans to hire more workers, prices will now adjust thus making it impossible to improve upon the economy. However, the government should have a role in stabilizing the price. Graphically, the aggregate supply curve is now vertical and any change in price or shift in the aggregate demand curve would still result in the same output, the AS curve is perfectly inelastic. This is the AS curve of the neoclassical economists. The neoclassical economists say that if there is 100 pesos lying on the ground, it is not just going to remain there and it will be injected into the economy.  100peso lying on the ground

In the very long run analysis, to increase output we must shift the overall AS curve. Technological progress, everything which we cannot explain that makes our lives better, is the key to a higher AS curve. At a higher AS curve, the same capital and labor would result in a higher output. For example, 5 programmers with 5 laptops produce 100 programs a year, then all of a sudden this output rises to 150 programs a year with the same amount of programmers and laptops, that is technological progress.

In the end, any macroeconomic policy should not be recommended based solely on this piece of evidence. There are many factors in an economy to take into account such as the characteristics of a nation and the political position of a certain macroeconomic policy. For example, the Philippine government has high tariffs on basic consumer goods such as rice, to be able to protect local farmers from the cheaper prices abroad ; A neoclassical economist would be against these trade barriers and support the removal of these tariffs. The removal of these tariffs should result in lower prices, but could cause a riot and political instability which is not considered by an economist.

Short run
Firms cannot change price because there is a lack of time for these changes to take place the government is effective in changing output and unemployment the Keynesian AS curve
Long Run
Firms have the ability to change price
the government is ineffective in changing output or unemployment gov't should just stabilize price because policy will only change the price the capacity of output is given
AS curve of the neoclassicals
Very Long Run
to increase output we must shift the supply curve
we can do this through technological progress, everything which we do not know which makes our lives better ex. education, increase productivity
same amount of capital and labor
Neoclassical believe that wages adjust quickly, and according to the graph, AS0 -> AS1 -> AS2 happens in months. The Keynesians believe that prices and wages take time to adjust that AS0 -> AS1 -> AS2 happens in years. For the Keynesians, policy changes at

Mainstream view
Neoclassicals view
prices and wages adjust quickly
AS0 -> AS1 -> AS2 in months...
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