2.4.3 Equilibrium Levels Of Real National Output ✅ Flashcards
When there is a shift what does the size of change depend on?
Size of shift + elasticity of line not moved.
What is real national out equilibrium? What are the two ways of showing it?
Intersection of AS and AD.
Keynesian + classical.
In a classical economics graph what can occur in the short run? Show graph of positive one?
Output gaps (negative and positive). You are able to go past full employment by unsustainably using factors of production.
For a classical economist what is the LRAS curve? What does this mean?
Inelastic perfectly AD shift will only effect price.
How/why will a short run positive output gap shift back to LRAS in LR? What is the outcome?
As in the LR wages are variable in supply meaning SR supply will shift back (to LRAS/full employment) as higher wages will increase production cost. Same production point but at higher price.
What do classical economists conclude?
They favour supply side policies.
- As AD shift increase will only in SR increase price and quantity.
- In LR it will only increase price. (Inflationary).
- Only way to increase output is through supply side policies. (Will lower price + increase output).
Draw a classical economist LRAS shift outwards and show effects?
What do Keynesian economist believe?
- Agree full employment is where LRAS is vertical.
- Believes equilibrium is less than full output (curve goes horizontal) as don’t believe rise in unemployment means fall in real wage.
- Economy has spare capacity.
What do keynesians believe is AD shifts? Draw supporting graph? So what does the shift overall depend on?
- AD shift depends where economy is. Shift is needed when in a deep recession resulting in more output.
- But if economy is at full capacity this shift will only cause inflation.
Overall = the elasticity of AS curve (if economy is at full employment).
How do Keynesian argue for LRAS shifts?
Only increase output + decreases price if shift occurs when equilibrium point is at full capacity.
How do keynesians argue the economy should do in a recession?
Use demand policies to shift AD.
How can the macro economic factor of investment impact AS and AD equilibrium? What does this depend on?
As investment will increase the LRAS capacity therefore the LR disequilibrium can be fixed. (AD shift can be fixed by LRAS shift).
Rate of returns.
