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Essay on Long-Run and Short-Run Concerns
The economy goes through business cycles in which output and employment are above or below their long-run levels. Even though monetary policy can't affect either output or employment in the long run, it can affect them in the short run. For example, when demand weakens and there's a recession, the Fed can stimulate the economy—temporarily—and help push it back toward its long-run level of output by lowering interest rates. That's why stabilizing the economy—that is, smoothing out the peaks and valleys in output and employment around their long-run growth paths—is a key short-run objective for the Fed and many other central banks.
The discussion around the growth rate of national income is often reduced to considering the problem of the so-called burden of investment. The faster the growth rate of the economy, the greater must be the share of productive investment in national income, and hence the smaller will be the share of consumption and non-productive investment. This means that with a rapid economic growth rate, consumption and non-productive investment will grow relatively slowly in the short run. However, in the longer term, the increase in national income would more than compensate for the relatively small share of consumption in national income. Indeed, the outcome for consumption would be more advantageous the longer the period taken into consideration. In other words, sacrifices in the form of reduced consumption in the short run would facilitate the achievement of a substantially higher level of consumption in the long run. The discussion concentrates on how far it is possible to go in sacrificing the present for the future.
In this kind of analysis it is usual to leave aside the issues of the balance in the labor market and the foreign-trade balance.........
