2.4.3 - Equilibrium levels of real national output

Question 1

Define equilibrium national output

Answer 1

Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change. At this point aggregate demand is exactly equal to aggregate supply.

Question 2

What do keynesian and classical economists agree

Answer 2

Both Keynesian and Classical economists agree that in the short run AD will be downward sloping and AS will be upward sloping.

Question 3

What does an increase/decrease in SRAS (Assuming AD stays constant) cause

Answer 3

• Increase in SRAS to SRAS2 has changes the equilibrium position
• There has been a fall in the price level and an increase in real GDP.
• A decrease in SRAS would lead to higher price level
  and lower real GDP ((equilbrium output))

Question 4

How do you identify the equilibrium level

Answer 4

Where AD1 and SRAS1 intersect: P1Y1
- equilibrium price level: OP
- equilibrum level of income and output OY

Question 5

How does an increase/decrease in AD (assuming SRAS remains constant) affect equilibrium levels

Answer 5

• The increase in the AD curve to AD2 has led to a change in equilibrium to P2Y2. Prices and real GDP are higher.
• A fall in AD would lead to lower price level and lower real GDP (equilbrium output)

Question 6

What increases AD?

Answer 6

• anything that increases a component of AD so generally speaking
  + a fall in interest rates increases consumption and investment
  + a fall in the xchange rate boosts exports, reduces imports
  + lowering of income tax will raise consumption because households now have high disposable income

Question 7

What causes a fall in SRAS

Answer 7

• wages of workers might rise
• raw material prices go up
• taxes on goods and services might be raised by government (these taxes must be paid by the business)