4. Macroeconomic Equilibrium

Question 1

What is equilibrium in Macro?

Answer 1

Is where AD meets AS. This is the point at which the general price level and output are stable.

Question 2

How does PL and Y get AD>AS back to AD=AS?

Answer 2

1) if AD shifts it can result in excess demand
2) the additional demand will push up price level as consumers bid up the prices of goods and services
3) the higher prices will cause a movement along the AS curve as producers are incentivised to produce more at higher prices increasing Y
4) this will continue until a new equilibrium of p2 and Y2 are found, the economy has experienced inflation and growth

Question 3

How does PL and Y get AS>AD back to AS=AD?

Answer 3

1) if AS shifts right the there may be excess supply
2) the additional supply will push down price level as producers discount prices of goods and services to sell surplus
3) the lower prices will cause a movement along the AD curve as consumers are more willing and ale to consume more at lower prices, increasing Y
4) This will continue until a new equilibrium of p2 and y2 are found, the economy has experienced less inflation and some growth