2.4.3: Equilibrium Levels Of National Output Flashcards
What is equilibrium?
Where withdrawals are equal to injections.
Where the AD and AS curve intersect.
What is macroeconomic equilibrium?
When the demand side and the supply side of the economy are equal to each other.
Macroeconomic equilibrium occurs when everything that has been ________ by ________ has been ________ by ________. There is no excess ________ or excess ________.
Produced, firms, consumed, households. Demand, supply.
Short-run equilibrium graph (Classical & Keynesian):
Long-run equilibrium graph (Classical):
Long-run equilibrium graph (Keynesian):
What causes a shift in AD for short-run equilibrium?
A change in any of the components (C, I, G, X, M).
What causes a shift in AS for short-run equilibrium?
A change in the costs of production.
What does an increase in AD do for Classical long-term equilibrium (in the short term)?
It increases prices and output.
What does an increase in AD do for Classical long-term equilibrium (in the long term)?
Due to over-full employment (i.e. overtime), firms end up increasing wages to attract the best workers (the same applies to other factors of production).
Eventually, the economy will be producing the same output at higher prices (as costs of production have increased).
What causes an increase in LRAS for Classical long-term equilibrium?
An increase in the factors of production.
What is the only method to increase output for Classical long-term equilibrium?
Increasing the LRAS (by increasing the factors of production).
Why is increasing AD not efficient for Classical long-term equilibrium?
It is inflationary.
Keynesian long-run equilibrium graph:
AD3 -> AD4 =
Increase in price, no change in GDP (inflationary).
Keynesian long-run equilibrium graph:
AD1 -> AD2 =
No change in price, increase in GDP.
Keynesian long-run equilibrium graph:
ADX -> AD5 =
Change in price and change in GDP.
