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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126

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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126
Chapter 33.2, Problem 2QQ
Textbook Problem
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How does the economy’s behavior in the short run differ from its behavior in the long run? • Draw the model of aggregate demand and aggregate supply. What variables are on the two axes?

To determine
How does an economy's behavior in short run differs from the long run.

Explanation of Solution

The short run and long run are the two time periods which differ in the allocation of time. The short run is a period which is short and is not enough to make the changes in the inputs of production. The period will be short and only the variable factors of production will be the labor. All the other factors of production require more time to change and thus under the short run, all the other factors of production will be constant. Whereas, the long run is a period in which every factors of production are changed. The period is long enough for the firm to make changes in the labor, capital, machineries and every factors of production.

The economy's behavior in the short run will be different from that of the long run for mainly one reason which is the assumption of the monetary neutrality. The monetary neutrality assumption does not work in the short run but work in the long run. Thus, in the short run, the real and nominal variables of the economy are highly intertwined and so the economy has to act according to it...

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