More Surprise
We can now define the "short run" and the "long run" as they apply to macroeconomics:
- Macroeconomic Long Run
- The macroeconomic long run is a period long enough so that businessmen have complete information about price levels, contracts based on old price levels expire, and expectations are fully adapted to the new situation.
- Macroeconomic Short Run
- The macroeconomic short run is a period short enough so that businessmen believe it is profitable to increase output when the price level is higher than they had expected, either because they have incomplete information about relative prices or because contracts for inputs at the old price level are still in force.
Thus, there are no surprises in the Macroeconomic Long Run. Since there are no surprises in the "long run," that's also why the Potential Output curve is vertical.
On the other hand, surprises in the price level are the key factor in the Friedman Curve, which some texts call Short Run Aggregate Supply. We could express that by saying "in the short run, Aggregate Supply is determined by price surprises." And sometimes we do express it that way.
But Where is the Friedman Curve?