Macroeconomics: Concepts of Short Run and Long Run

Question 1 

Macroeconomics for the long-run, pertains to understanding the trends in series such as unemployment rates of a country and real GDP, among others. Differently, macroeconomics for the short-run is about understanding the annual or quarterly fluctuations in, for example, the state of the unemployment and the GDP of a nation. This distinction is important because it allows economists to study changes in aggregate demand and aggregate supply in an economy. For the short-run macroeconomics, changes in aspects such as GDP and unemployment rate do not respond to economic conditions ( Kalyanaraman, 2015 ). In the long-run macroeconomics, the analysis will focus on the flexibility of wages and prices. For example in the long-run employment can shift to its natural level while GDP reaches its real potential 

Question 2 

Theoretically, the Phillips Curve shows the inverse tradeoff between inflation and the rate of unemployment that can exist in a growing and healthy economy. In the short run, if the government overestimates the natural rate of unemployment and thus institutes expansionary fiscal, monetary policies to lower it, the inflation rate will increase. The policies implemented are geared at lowering unemployment rates, which are already low. The inverse relationship between unemployment will be magnified, resulting in higher rates of inflation ( Pettinger, 2017 ). The increase in aggregate demand explains a high inflation rate. 

In the long-run macroeconomics, there is no tradeoff between untenable price increases and unemployment. At normal unemployment rates, the curve is presented by a vertical line. Therefore expansionary policies will only temporarily decrease unemployment rates as the economy will readjust to the natural rate. Expansionary policies by the government will increase aggregate demand, which in turn will necessitate hiring more employees by businesses with a view of increasing production. Consequently, employment opportunities will increase ( Pettinger, 2017 ). Nevertheless, higher inflation will force the short-run Phillips curve to move to the right, thus achieving stability, which is characterized by a natural rate of unemployment while inflation remains high. 

Question 3 

Macroeconomics volatility is founded on the Keynesian principles and predominantly centers on total expenditures and its elements. The most important components are variations in investment spending, which is responsible for the total amount demand for all end products and services and sudden and infrequent events that can temporarily cause a decrease in the supply of goods and services. The spending-income multiplier has significant input in creating macroeconomic instability whereby the variations of investment spending and their multiplier effects cause substantial changes in aggregate demand ( Skorobogatova, 2016 ). As a result, upward pressure on prices occasioned by excess injection of money into the economy can happen if the triggers of investment expenditure do not achieve their objective. 

Question 4 

Basic Equation of Monetarism 

MV=PQ 

Where: 

M= total money spent 

V=velocity of money 

P=average figure that defines the selling price of a unit 

Q= tangible volume of all products and services 

PQ=nominal GDP 

The relationship moves from left to right in the above equation. When the supply of money is increased at an invariable and expectable V, either P or Q can result. When Q increases, it implies that P is relatively constant. Differently, a rise in P will happen if there is no equivalent rise in Q. A variation in the supply of money over some time will directly impact employment rates, prices, and production ( Jahan & Papageorgiou, 2014 ). According to monetarists, changes in the supply of money triggered by inappropriate fiscal policies are the primary cause of macroeconomic instability. 

References 

Jahan, S., & Papageorgiou, C. (2014). What Is Monetarism? - Back to Basics - Finance & Development, March 2014. Retrieved 14 November 2019, from www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm 

Kalyanaraman, L. (2015). Long-run and Short-run Relationship between Macroeconomic Factors and Returns on Sectoral Indices in Saudi Arabia: An Empirical Analysis.  Mediterranean Journal of Social Sciences ,  6 (2). 

Pettinger, T. (2017).  Phillips Curve | Economics Help . [online] Economicshelp.org. Available at: www.economicshelp.org/blog/1364/economics/phillips-curve-explained/ [Accessed 14 Nov. 2019]. 

Skorobogatova, N. (2016). Macroeconomic instability: its causes and consequences for the economy of Ukraine.  Eastern Journal of European Studies ,  7 (1), 63-80.