Fan Jianjun, General Office, Development Research Center of the State Council (DRC)

Research Report No 8, 2015 (Total 4693)

Abstract:

It is agreed in modern mainstream economics that, in a monetary economy, nominal aggregate demand decides real aggregate supply in the short term, while real aggregate supply decides nominal aggregate demand in the long term. So, macroeconomic regulation can be divided into short-term and long-term, based on the relations between aggregate supply and demand. Since the short-term general price level and the economy's potential maximum output remain unchanged, the focus of short-term regulation is nominal aggregate demand (currency supply) and the goal is to push the real output to the maximum possible. So, in the long term, there will be a full market clearing. The government can shift the regulation's focus from demand to supply, that is, to maximize output through specific structural policies. Short-term regulation is also known as aggregate regulation and long-term regulation is structural regulation. Instead of contradicting each other, they in fact complement each other.