2.4 - Equilibrium levels of real national output

Question 1

Equilibrium Real National Output

Answer 1

• The equilibrium real national output is the level of GDP where aggregate demand (AD) equals aggregate supply (AS).
• At this equilibrium, there is no tendency for the economy to change its output level; all produced goods and services are sold, and there is neither excess supply nor excess demand.

Question 2

Characteristics of Equilibrium Real National Output:

Answer 2

• Price Stability: Prices are stable, with no inflationary or deflationary pressures.
• Full Employment: The economy operates at full employment, meaning all available resources are utilised efficiently.
• Sustainable Output: The output level is sustainable in the long run without causing imbalances.

Question 3

AD/AS Model:

Answer 3

• The Aggregate Demand (AD) curve represents the total quantity of goods and services demanded at different price levels.
• The Aggregate Supply (AS) curve represents the total quantity of goods and services that producers are willing and able to supply at different price levels.
• The intersection of the AD and AS curves determines the equilibrium price level and real national output.

Question 4

How Shifts in AD Cause Changes in the Equilibrium Price Level and Real National Output

Answer 4

• Increase in AD:
  > Caused by factors such as higher consumer confidence, increased government spending, or tax cuts.
  > Results in a rightward shift of the AD curve.
  > Leads to a higher price level (inflation) and an increase in real national output.
• Decrease in AD:
  > Caused by factors such as reduced consumer spending, lower government expenditure, or higher taxes.
  > Results in a leftward shift of the AD curve.
  > Leads to a lower price level (deflation) and a decrease in real national output.

Question 5

How Shifts in AS Cause Changes in the Equilibrium Price Level and Real National Output

Answer 5

• Increase in AS:
  > Caused by factors such as technological advancements, reduction in production costs, or improvements in labour productivity.
  > Results in a rightward shift of the AS curve.
  Leads to a lower price level and an increase in real national output.
• Decrease in AS:
  > Caused by factors such as natural disasters, increased production costs, or labour strikes.
  > Results in a leftward shift of the AS curve.
  Leads to a higher price level and a decrease in real national output.