Week 7- The Economy in the Very Long Run

 

So far we have analyzed what is the effect of different shocks to the economy on output, unemployment, deficit, interest rates, exchange rates and prices. We reached the conclusion that there are policies that have an impact in the short run but over the long run those effects tend to disappear and the economy  goes back to the natural level of output.

This week we analyze what can we do to make the natural level of output grow over time. This is the same as asking what can we do to shift aggregate supply toward a higher level of output in the long run. The answer to this question is basically that we need improvements in physical or human capital. Because improving physical and human capital takes a very long time, the economy will only befit from those over the very long run. 

To fully understand these questions we will use what is called the Solow growth model. Because this model requires slightly different technical tools from the ones that we have been using over the last few weeks, we will take some time to develop those tools before we can use the model to explain growth. 

 


To Do: