1 Introduction to Macroeconomics
2 Measuring the Macroeconomy
3 An Overview of Long-Run Economic Growth
4 A Model of Production
5 The Solow Growth Model
6 Growth and Ideas
7 The Labor Market, Wages, and Unemployment
8 Inflation
9 An Overview of the Short-Run Model
10 The IS Curve
11 Monetary Policy and the Phillips Curve
12 Stabilization Policy and the AS/AD Framework
13 The Global Financial Crisis: Overview
14 The Global Financial Crisis and the Short-Run Model
15 The Government and the Macroeconomy
16 International Trade
17 Exchange Rates and International Finance
18 Parting Thoughts




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Chapter 9: An Overview of the Short-Run Model

Chapter Outline

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Key Concepts

  1. The long-run model determines potential output and the long-run rate of inflation. The short-run model determines current output and current inflation.

  2. In any given year, output consists of two components: the long-run component associated with potential output , and a short-run component associated with economic fluctuations . The latter component is called short-run output and is a key variable in our short-run model.

  3. Another way of viewing is that it is the percentage difference between actual and potential output. It's positive when the economy is booming, and negative when the economy is slumping. A recession is a period when actual output falls below potential, so that short-run output becomes negative.

  4. In the slump associated with a recession, the cumulative loss in output is typically about 6 percent of GDP - about $2,400 per person or $10,000 per family of four. The gains from eliminating fluctuations in short-run output are smaller than this, however, because of the benefits associated with a booming economy.

  5. An important stylized fact of economic fluctuations is that the inflation rate usually falls during a recession. This fact lies at the heart of our short-run model in the form of the Phillips curve. The Phillips curve captures the dynamic trade-off between output and inflation: a booming economy leads to a rising inflation rate, and a slumping economy to a declining inflation rate.

  6. The essence of the short-run model is that the economy is hit with shocks, which policymakers may be able to mitigate, and inflation evolved according to the Phillips curve. Policymakers use monetary and fiscal policy in an effort to stabilize output and keep inflation low and steady. This task is made difficult by the fact that potential output is not readily observed, and the economy is always being hit by new shocks whose effects are not immediately obvious.

  7. Okun's law, which allows us to go back and forth between short-run output and the unemployment rate, says that a one percentage point decline in output below potential corresponds to a half percentage point increase in the unemployment rate.

9.1 Introduction

9.2 The Long Run, the Short Run, and Shocks

  • Trends and Fluctuations
  • Short-Run Output in the United States
  • Case Study: The Great Depression
  • Measuring Potential Output
  • The Inflation Rate

9.3 The Short-Run Model

  • A Graph of the Short-Run Model
  • How the Short-Run Model Works
  • The Empirical Fit of the Phillips Curve
  • Summary

9.4 Okun's Law: Output and Unemployment

  • Case Study: Can the Macroeconomy Predict Presidential Elections?

9.5 Filling in the Details

9.6 Additional Resources

  • Summary
  • Key Concepts
  • Review Questions
  • Exercises
  • Worked Exercises
« Return to Chapter 09 Study Plan