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24.1 Three Macroeconomic States - Coggle Diagram
24.1 Three Macroeconomic States
The Short Run
Why We Study This State?
Shows effects of AD and AS shocks on real GDP
Key Assumptions
Factor prices are exogenous (outside model)
Technology and factor supplies (and thus Y*) are constant
What Happens
Real GDP DETERMINED by AD and AS
; MACRO EQUILIBRIUM
The Adjustment of Factor Prices
What Happens?
Factor prices are assumed to adjust in response to output gaps
Key Assumptions
Factor prices are flexible/endogenous
Technology and factor supplies are assumed to be constant (and therefore Y* is constant)
Why Study This State?
See how output gaps cause factor prices to change and why real GDP tends to return to Y*
The Long Run
Key Assumptions
Factor prices are assumed to have fully adjusted to any output gap
Technology and factor supplies are assumed to be changing
What Happens
Potential GDP grows over long run
Why We Study This State
To understand nature of long-run economic growth
; not common seeing factor prices have fully adjusted to ALL AD and AS shocks