2.4 Macroeconomic Equilibrium

Question 1

What is short run equilibrium

Answer 1

Occurs when SRAS is equal to AD

Question 2

What does SRAS determine

Answer 2

GPL and real GDP

Question 3

What does an increase in AD lead to

Answer 3

An expansion of SRAS leading to a higher equilibrium level of national output

Question 4

What does an increase in SRAS lead to

Answer 4

An expansion of AD and a higher equilibrium level of national output

Question 5

Define long run macroeconomic equilibrium

Answer 5

Long run macroeconomic equilibrium occurs when long run aggregate supply is equal to aggregate demand

Question 6

For classical economists, what does an increase in AD cause

Answer 6

An increase in AD will be purely inflationary as the economy in the long run is operating at maximum potential output

Question 7

explain the results of outward shifts of AD on the Keynesian curve (non inflationary growth)

Answer 7

• non inflationary growth as an outward shift in AD can be met without an increase in the GPL because aggregate supply is highly elastic (lots of spare capacity)

Question 8

explain the results of outward shifts of AD on the Keynesian curve (inflationary pressures)

Answer 8

• inflationary pressures as an outward shift in AD eventually causes a sharp rise in the GPL because AS is now inelastic (output close to full capacity levels)