2.4.3 Equilibrium levels of Real National Output

Question 1

What is equilibrium real national output?
+ key characteristics

Answer 1

The equilibrium real national output is the level of GDP where aggregate demand (AD) equals aggregate supply (AS).
At this equilibrium, there is no tendency for the economy to change its output level; all produced goods and services are sold, and there is neither excess supply nor excess demand.

Key Characteristics:
1. Price Stability: Prices are stable, with no inflationary or deflationary pressures.
2. Full Employment: The economy operates at full employment, meaning all available resources are utilized efficiently.
3. Sustainable Output: The output level is sustainable in the long run without causing imbalances.

Question 2

How do shifts in Aggregate Demand affect Equilibrium Price Level and Real National Output?

Answer 2

Increase in AD:
Caused by factors such as higher consumer confidence, increased government spending, or tax cuts.
Results in a rightward shift of the AD curve.
Leads to a higher price level (inflation) and an increase in real national output.

Decrease in AD:
Caused by factors such as reduced consumer spending, lower government expenditure, or higher taxes.
Results in a leftward shift of the AD curve.
Leads to a lower price level (deflation) and a decrease in real national output.

Question 3

How do shifts in Aggregate Supply affect Equilibrium Price Level and Real National Output?

Answer 3

Increase in AS:
Caused by factors such as technological advancements, reduction in production costs, or improvements in labor productivity.
Results in a rightward shift of the AS curve.
Leads to a lower price level and an increase in real national output.

Decrease in AS:
Caused by factors such as natural disasters, increased production costs, or labor strikes.
Results in a leftward shift of the AS curve.
Leads to a higher price level and a decrease in real national output.