2.4.3 - Equilibrium levels of real national output

Question 1

When does Real national output equilibrium occur ?

Answer 1

• When Aggregate demand intersects with Aggregate supply.

Question 2

Short Run AS increase in AS diagram.

Answer 2

Question 3

Short Run AS increase in AD diagram.

Answer 3

Question 4

Classical: How can the SRAS equilibrium go past the full employment level. (Draw diagram to show this)

Answer 4

● The short run equilibrium point occurs where SRAS1 =AD1. This gives a price level of P1 and output of Y1.

● The short run equilibrium is able to go past the full employment level. This is due to the fact that full employment is the maximum level of output that an economy can achieve using all factors of production at sustainable levels. Therefore the economy is able to go past this point through the unsustainable use of factors of production e.g. paying workers overtime.

Question 5

Clasicial: Negative output gap.

Answer 5

● The short term equilibrium point can also occur before the full employment point. In this example the economy is operating at the point where AD1 = AS1, giving a price level of P1 and output of Y1. The difference between Y1 and YFE is known as a negative output gap.

Question 6

Classical: LRAS. SRAS a and AD

Answer 6

● In the long run, wages become variable and therefore the economy adjusts to a point of full employment through the reduction in wage costs for firms.
● Long run equilibrium is shown in this diagram as LRAS=SRAS=AD. The classical theory states that an economy will always be at full employment in the long run.

Question 7

Keynesian: Negative output gap

Answer 7

● As shown by the diagram, although the economy is currently operating far from full employment, the point where AD1=LRAS1.
● This means that without any form of expansionary policy in place, the output gap of Y1 to YFE will exist in the long run.

Question 8

Explain this diagram

Answer 8

● Shift from AD3 to AD4 - Purley inflationalry and woulf only increase price not output. As the equilibrum point chages from PY2Y3 to P2Y3.

● Shift from AD1 to AD2 - Only an increasin output and not peice. As the equilibrumm changes from P1Y1 to P1Y2.

● With the keynsian curve, the impact of a shift in AD stringy depends on the elasticty of the curve and so the elastcity shows wetyher or not the economy is at near full employment.

Question 9

Exam tip

Answer 9

Question 10

Answer 10

● The initial potential output of this economy is seen at YFE
The economy is in equilibrium at the intersection of AD1 and LRAS (AP1YFE)

● LRAS1 to LRAS2 - Any factor that affects the **qualoty or quanty **of labour will casue this shift. Assuming that AD remains the same **average prices will fall (AP1→AP3**) and the LRAS curve so output will increase (YFE→YFE1)

● If the starting point of this economy had been the equilibrium at **AD2Y2, then according to Keynesian, an increase in LRAS would not impact the economy as it is stuck in a depression & requires AD to increase** in order to change national output.