Three Macroeconomic States

The Short Run

Some assumptions:

• Factor prices are assumed to be exogenous
• Technology and factor supplies are assumed to be constant (Y* is constant)

The equilibrium is determined by the intersection of the AD and AS curves

The Adjustment of Factor Prices

Some assumptions:

• Factor prices are assumed to adjust in response to output gaps
• Technology and factor suppliers are assumed be constant (Y* is constant)

Analyzing the adjustment process that takes the economy from the short run to the long run

The Long Run

Some assumptions:

• Factor prices are assumed to have fully adjusted to any output gap
• Technology and factor suppliers are assumed to be changing (and typically growing)

The Adjustment Process