Why is it useful to analyze " Short-run output" graph and "potential and actual real gdp...

Why is it useful to analyze " Short-run output" graph and "potential and actual real gdp graph". What economic challenges does each graph depict and what economic successes does each graph depict? (for USA specifically)

Expert Solution

It is useful to analyze short run graph because these graphs depicts how the economy will respond to a particular shock whether it is demand side or supply side shock in the short run mainly considering the period of less than one year. This tells us the immediate impact of the policy on the economy. The potential and actual real GDP graph of the economy depcits the long run situation of the economy and how self automatic adjustments or government interventions will bring the economy back to their potential level of output.

Challenges in the short run graph include relaxation of assumptions where we take factors that have been held constant to change in the economy and when these factors change, then the model fails to show the impact. The success is it shows the impact of shocks on the economy and how the government should respond. In the long run, the challenge is to determine the potential level of output in the economy and success is one it is determined it shocks the long run impact on the economy very clearly.

Rahul Sunny answered 2 years ago

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