16. Macroeconomic equilibrium

Question 1

Define national income

Answer 1

National income is equal to the level of output that a country produces and is a key sign of the economic healthof an economy

Question 2

Explain short-run economic equilibrium

Answer 2

SRAS and AD interesect - at price P and output Y - no reason to change anything - o upwards/downwards pressure - no inlfationary/deflationary pressure

Question 3

Explain long-run macroeconomic equilibrium in classical concept

Answer 3

AD equals LRAS - new classical or Keynesian

• new classsical: always at full output, any changes in AD will affect only price level
• have a diagram which shows effects on both AS and LRAS of AD change
  1. Increase in AD - inflationary gap created - output larger than potential output
  2. Only possible in short-run (overtime wages - short-term solution) - in long-run potential comes back to Y_f as there are no unemployed resources
  3. Increase in AD in long-run results only in increased price level - all prices in the economy increase - no real gain in output
• If opposite - decrease in AD - pin short-run output decreased - in long-run only price level decreased*

Question 4

Why new classic economists believe in perfectly elastic LRAS

Answer 4

Because they support completely free market with no gov intervention - most efficiently producused - opeartes at full potential

Question 5

Explain long-run macroeconomic equilibrium in Keynesian perspective

Answer 5

Where AD meets LRAS - many equilibrium points - economy may be at equilibrium below full level of output - spare capacity = in Keynesian - the level of output depends on AD

If AD does not raise prise level - deflationary gap = output gap (quantity demanded is lower than the full potential output)

If AD raises price level (producers componsate for higher productoin costs) - inflationary gap/pressure

If AD increases at Yf - no extra output produced - only price level rises - to allocate scarce resources

Question 6

Explain demand-side policies

Answer 6

Demand-side policies - gov wants to steer towards full potential level fo output:

• expansionary: fiscal/monetary
• contractionary: fiscal/monetary

Question 7

Define expansionary policies

Answer 7

Expansionary policies: policies aimed at increasing AD to increase the equilibrium level of output

Question 8

Define contractionary policies

Answer 8

Contractionary policies: policies aimed at decreasing AD to reduce inflation pressure which is caused by price level increase

Question 9

LRAS increase effect in Keynesian/classical perspectives

Answer 9

Possible effects:

• in Keynesian: if Y below Y_f - increase in LRAS - no effect
• in classical: Y is at Y_f - increase in LRAS - increase in Y_f, decrease in price level