I. Wh t to distinguish short run versus long run period in macroeconomics? Expla

Question

I. Wh t to distinguish short run versus long run period in macroeconomics? Explain. What are the criteria for this division? Give complete explanation. II. Indicate whether each item in the following list is related to either short-run cycle) macro, or to long-run (LR, economic growth) macro, or to the both. Explain each of your (a) The Federal Reserve reduces interest rates in an attempt to stimulate economic (b) The federal government introduces higher standards for estimation of the quality of high- (c) The Congress approves a program providing a considerable increase in government spending (d) The Central Bank decreases the rate of money growth to lower inflation. answers briefly. (Hint do not rewrite the statements, put letters only and give your reasoning) higher employment. school education. on health care activity and (e) Consumers become thriftier because news of layoffs makes them fear for their jobs (f) The federal government cuts income taxes and welfare benefits to encourage more people to (g) The introduction of an investment tax credit stimulates firms to finance more investment (h) The federal government gives states and localities more money to repair roads, bridges, and enter the labor force. projects. schools

Explanation / Answer

1. It is importatnt to distinguish between short run and long run in macroeconomics because our underlying principles in macroeconomics, the two most important ones Classical ad keynesian are based on such distinctions. The classical model is a long run model where all the variables are back at the eqm values while the keynesian one is a short run model where the variables vary and bring change in the system. They are important for the distinction between the efficacy of monetary and fisal policy.

There is no time period associated with it. So, we can distinguish them on the basis on our ability to change them. Mostly, it is associacted which how can we change the variables. If atleast one of them is fixed we say it is short run. Ex. Interest rate is generrally fixed in short run.

2.

a. SR, it will stimulate the economy and in LR all variables are abck to the natural rate.

b.LR, this is an institutional developement will have LR effect as they take time to build.

c.SR and LR, both as increase in expn will increase the producitvity of work force hereby changing the natural levels of output and unemployment.

d.SR part of the business cycle. neutrality of money

e.SR part of busniess cycle

f. SR LR institution buliding and part of business cycle

g. SR LR, needs to more investment and increase in production capacity

h. LR, better institutions lead to growth in LR

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