2.4.3 Equilibrium real national output

Question 1

When does equilibrium national income occur?

Answer 1

Equilibrium national income occurs when injections = leakages
I.e. I+G+X = S+M+T
We can also say that equilibrium occurs when AD = AS.

Question 2

What does short run equilibrium look like on AD/AS diagram?

Answer 2

Question 3

What is the impact of an increase in AD?

Answer 3

• An increase in AD causes an expansion of aggregate supply and a higher equilibrium level of national output.
• An outward shift of aggregate demand will bring about a cyclical rise in output and employment.

Question 4

What is the impact of a fall in AD?

Answer 4

• A decrease (inward shift) in AD causes a contraction of AS and a lower equilibrium level of national output
• This is the AD-AS diagram to use in an exam when analysing the likely causes of an economic recession

Question 5

What is an impact of an increase in AS?

Answer 5

• An increase in AS causes an expansion of AD and a higher equilibrium level of national output.
• An outward shift of aggregate supply e.g. caused by lower unit costs should help to increase business profits.

Question 6

What is an impact of a fall in AS?

Answer 6

• A decrease in AS causes a contraction of AD and a lower equilibrium level of national output
• An inward shift of aggregate supply e.g. caused by a rise in unit costs will lead to lower business profits

Question 7

What are the macro causes of a fall in AS?

Answer 7

Question 8

What are the possible macro consequences?

Answer 8

Question 9

What are the causes of a fall in LRAS?

Answer 9

• Damaging effects of natural disasters such as drought, a tsunami, an earthquake and severe floods
• Destruction / loss of factor inputs caused by civil war/political conflict that last for many years
• Large scale labour migration e.g. due to a depression that leads to a brain drain of skilled workers
• Trend declines in productivity perhaps caused by a persistent recession which causes net capital
• investment to be negative
• Ageing population (as is occurring in Japan)

Question 10

When essays ask me to to assess / discuss the impact of a macro event / policy on the economy’s
performance (impact on the main macroeconomic objectives), what can I do to start?

Answer 10

In Year 2, you can start with AD/AS analysis, before then moving onto more “2nd year”
topics such as fiscal effects, inequality, development etc.

Question 11

What are the possible macro consequences of a fall in AS?

Answer 11