Models are simplified depictions that attempt to capture just the essential elements
of how the world works. We use a variety of models to focus on a variety of economic
questions.
We use the concepts of growth theory, aggregate supply, and aggregate demand to
focus our discussion.
Growth theory explains the very long run behavior of the economy through understanding
how productive capacity grows.
In the long run, productive capacity can be taken as given. Output depends on aggregate
supply, and prices depend on both aggregate supply and aggregate demand.
In the short run, the price level is fixed and output is determined by the level of
aggregate demand.
