Chapter one notes Economist have contradictory views because they have different assumptions about how the

economy works and different time frames. Price movement is what drives the market back to equilibrium, thus the slower the price moves the slower it’ll take to get to equilibrium. Classical or market clearing paradigm prices are assumed to be flexible, but in Keynesian or non-market clearing paradigm some prices are assumed to move slowly or to be fixed. This is why classical paradigm are assumed to work better on the long run while Keynesian is better for the short run. There are 4 times frames for analysis. Very Long run o Growth theory is used o Short run fluctuations such as recessions are ignored and the focus is on how quickly the ecomony grows on average o AS is vertical and shifting over time Long run o Flexible prices and market is still in equilibrium but productivie capacity is not changing o AS is fixed and vertical Very short run o Prices are assumed fixed o AS curve is hortiontal o Changes in AD will affect output only(wheras in the long run they affect price level only) Short run o Prices adjust somewhat but not fully o AD affect both output and price level Estimated time frames Very short run – a few months Short run – less then a year Long run – 1-20 years Very long run – 20 years or more

Very long run growth model is trying to explain growth rate averages over a long period of time, and year-to-year fluctuations are characterize as business cycles which are examined by short run models. They look at:


Consumer price index Unemploymenet rate Balance or trade(difference between inports/exports) Foreign exchange rate

When using models, you must always take proper care in understanding what assumptions you are inputting into it. No single model can apply to all problems. Two types of variables – endogenous variables o are determined within the model exogenous variables o are determined outside the model all models work in this way: a change in an exogenous variable goes through the model and changes the endogenous variable(outputs change the final result). Sticky prices are prices that cannot adjust quickly enough to keep markets in equilibrium(Keynesian models are sometimes called sticky price models). Price movement phases: Fixed – does not change Sticky – changes slowly Flexible – changes rapidly The Philips curve is a measure of the speed of adjustments of prices. Money and interest rates Bank of Canada has two monetary policy variables 1. rate of growth of the money supply 2. level of short-term interest rate

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