By Manzur Rashid, Peter Antonioni

Part of Macroeconomics For Dummies Cheat Sheet, UK Edition

How do you know how changes in the economy will affect you? You should observe the change over time. Macroeconomists consider these three timeframes when assessing the impact of a change on the economy:

  • Short run: Prices are sticky in the short run, which means that fiscal and monetary policy (or indeed any change in aggregate demand) has real effects. For example, expansionary fiscal policy (increasing government spending or reducing taxes) increases output, as does expansionary monetary policy (reducing the interest rate by increasing the money supply).

  • Long run: Prices are flexible in the long run, which means that fiscal and monetary policy (or any change in aggregate demand) has no real effects (unless it also impacts on the supply side of the economy). For example, expansionary fiscal or monetary policy leaves output unchanged and creates only inflation.

  • Very long run: Prices are flexible and the emphasis is on economic growth. Policies that increase the quantity and quality of factors of production or encourage technological progress result in economic growth.