Medium deadline

The medium term is a concept from economics that analyzes the economic behavior of an economy within a medium-term time frame. In addition to the short and long term, the medium term is a concept of term .

Time horizons

The macroeconomics are three different time horizons to explain the economy. In this context, a distinction is made between the short, medium and long term. However, the different deadlines are usually difficult to integrate into time intervals.

Short deadline

• The short term explains the changes in an economy from day to year.

• The premise of this concept is that the price level is constant. Production usually deviates from its natural production potential , as no adjustments are made via prices.

• In the event of fluctuations in demand, the adjustment on the goods market takes place exclusively through quantities, and changes in production do not have any price effects.

Medium deadline

• The medium term is characterized by the fact that the price level is flexible.

• Prices and wages adjust after a certain period of time, and as a result, the economy returns in the medium term to an equilibrium in which production and the unemployment rate only depend on structural factors, such as the flexibility of the labor market.

• Production always returns to the natural production potential. This adjustment process takes place by aligning the actual price level with the price expectations.

• According to Olivier Blanchard , the medium-term time frame is 10 years.

Long term

• The long term model is the subject of growth theory and explains a period of approximately 50 years.

• With the long term, the assumption is made that the production capacity is given. The level of production capacity determines output and demand.

Application example: The medium-term equilibrium in the AS-AD model

The AS-AD model represents the equilibrium in the closed economy.

The macroeconomic equilibrium is achieved through the relationship between the aggregated supply function (AS), which represents the equilibrium condition on the labor market, and the aggregated demand function (AD), which represents the equilibrium condition in the goods and money market.

AS function : ${\displaystyle P=P^{e}(1+\mu )F\left(1-{\frac {Y}{L}},z\right)}$

AD function : ${\displaystyle Y=\left({\frac {M}{P}},G,T\right)}$

The macroeconomic equilibrium that determines these two functions can be viewed over the short or medium term .

Adjustment process in the middle equilibrium

The short-term equilibrium A ₀ forms the starting point. If the production Y _{0 is} not equal to its natural level Yn at this point, the adjustment process begins in the medium term.

In Figure 1, at point A _0, production is above its potential (Y ₀ > Y _n ). In this case, the actual price level is above the expected prices (Po> Pe). At the time the tariffs were set, the negotiating partners expected a lower price level. Due to the now higher actual price level, the collective bargaining partners will set higher wages (w). As wages react with a delay, the AS curve only shifts upwards along the AD function to equilibrium A ₁ after a certain time .

The companies pass on the higher wages to their customers through higher prices. Because of this, the overall price level increases. The higher price level causes a decrease in production and reduces the real money supply (M), which in turn causes an increase in the interest rate (R). When point A _{1 is} reached, the adjustment process is repeated until equilibrium A _{2 is} reached and production corresponds to its natural level (Y = Y _n ).

In the opposite case, when production is less than its natural level, the price level falls. Demand and production are increasing.

Summary

• In the case of short-term equilibrium, production can deviate from natural production potential. The production depends on the expected price level and on the determining factors that change the position of the AD curve.

• Production always corresponds to its natural potential in the medium-term equilibrium. The adjustment mechanism until the natural price level is reached is based on the flexible price level.

literature

• Olivier Blanchard , Gerhard Illing : Macroeconomics . 4th edition. Pearson study. Pearson, Munich 2006, ISBN 3-8273-7209-7 .
• Wolfgang Cezanne : Basic features of macroeconomics . 7th edition. Oldenbourg, Munich 1998, ISBN 3-486-21842-5 .
• Rudiger Dornbusch , Stanley Fischer , Richard Startz : Macroeconomics . Oldenbourg, Munich 2003, ISBN 3-486-28431-2 .
• Josef Forster, Ulrich Klüh , Stephan Sauer : Exercises on Macroeconomics . Pearson study. Pearson, Munich 2005, ISBN 3-8273-7208-9 .

supporting documents

1. ↑ See Olivier Blanchard, Gerhard Illing: Macroeconomics. P. 836.
2. ↑ See Olivier Blanchard, Gerhard Illing: Macroeconomics . P. 837.
3. ↑ See Dornbusch, Fischer, Startz: Macroeconomics. P. 6.
4. ↑ See Olivier Blanchard, Gerhard Illing: Macroeconomics . P. 213.
5. ↑ See Olivier Blanchard, Gerhard Illing: Macroeconomics . P. 189.