Question

Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?

Short answer

The main difference between the short run and long run in macroeconomics is that the input prices are fixed in the short run, but they are flexible in the long run.

The distinction is crucial as it helps policymakers choose appropriate policies, keeping in mind the short-run and long-run impact of those policies.

Step-by-step solution

The distinction between short run and long run 

In macroeconomics, the main point of distinction between the short and long run is the responsiveness of input prices.The short-run is a period in macroeconomics when the input prices remain fixed in response to changes in output prices.This happens because the workers cannot anticipate inflation correctly, so they do not bargain for higher wages. Hence, the input prices remain unchanged in the short run.

In contrast, the long run is a period in macroeconomics when the input prices change entirely in response to a change in output prices. This happens because the workers can correctly anticipate inflation (or rise in output prices), so they bargain for higher wages. This causes wages or input prices to rise in the long run.

The importance of the distinction 

The distinction between the short and long run is crucial as it helps to understand the impact of various government policies in the short and long run. In other words, the economy behaves differently concerning a particular policy in the short and long run. So it helps the government to adopt appropriate monetary or fiscal policy to stabilize the economy, keeping in mind the short-run and long-run impacts of those policies.