2.4.3 - Equilibruim levels of real national output

Question 1

What is macroeconomic equilibrium mean?

Answer 1

This is when demand-side of the economy and supply-side of the economy equal each other.

This means that everything that has been produced by firms, has been purchased and consumed by households.

In macro-economic equilibrium there is no excess demand or excess supply.

Question 2

What is the graph for keynesian long-run equilibrium?

Answer 2

It’s a LRAS curve

Question 3

Describe a LRAS curve for keynesian long-run equilibrium

Answer 3

• Y axis labelled as “Price Level”
• X axis is labelled as “Real National Output”
• Demand line laellled as “AD”
• LRAS curve from “P” on the X axis and then curving upwards
• Y (placed from one point on the LRAS curve) placed on the X axis and FE placed on the LRAS curve

Question 4

What does FE stand for?

Answer 4

Full employment

Question 5

What would classical economists advocate for in terms of supporting economic policies?

Answer 5

They would advocate and support economic policies that improve long-run aggregate supply.

That is not to say that aggregate demand is unimportant.

But, if AD increases with no attention given to improving
the quality and quantity of factor resources, inflation will
occur and damage economic growth

Question 6

What would keynesian economists advocate for in terms of supporting economic policies?

Answer 6

Keynesian economists would advocate and support economic policies that improve and manage aggregate demand.

That is not to say long-run aggregate supply is unimportant.

But, if the economy is operating significantly below its full potential e.g. in a recession, Keynesian economists would
focus attention on policies that stimulate the components of AD (C, I, G, X, M).

Question 7

Firstly, draw out a LRAS curve with an expansion to AD

Secondly, explain the effects of AD increasing to AD1

Answer 7

• First and foremost one of the AD components have to have an increase in them whether it’s consuption, investment, government expenditure or net trade
• Then after one of them increases AD will consequently increase to AD1
• This will then increase P to P1 (increase in inflation)
• This is also increase Y to Y1 decreasing spare capcity as real national output has increased (more employement)

Question 8

Explain what happens when there’s an increase from AD1 to AD2 without an increase in LRAS

Answer 8

• If FE has been reached from AD1 to AD2 then the price level will obviously increase.
• Any increase after this will be totally inflationary as FE as already been reached

Question 9

Explain what happens if AD is depressed (placed at the lower parts of the LRAS curve) at AD3 and at AD3 moves AD4

Answer 9

• The price level would remain unchanged as there would be a siginificant amount of spare capacity in the economy. This means that increases can be absorbed without any addition to the price level.
• Therefore, any policies to increase LRAS would simply
  enhance spare capacity and leave the equilibrium level of
  employment unchanged.

Question 10

Explain what happens if there is a shift in LRAS?

Answer 10

• There will be an expansion along the AD curve.
• Then, the price level will decrease as available factor resources are increased and scarcity reduces.
• Then Real national output increases to Y1 and maximum productive potential increases to FE1, indicating economic growth.

Question 11

This isn’t a question but on the powerpoint online for 2.4.3, on slide 11 of the powerpoint there are some video clips which you can watch in order to show those events impact AD/AS in the real world.

Answer 11

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