CH29 Equilibrium levels of real national output

Question 1

when is the economy in equilibrium?

Answer 1

the economy is in equilibrium when aggregate demand equals aggregate supply

Question 2

in the short run, when does equilibrium occur?

Answer 2

it occurs when aggregate demand equals short run aggregate supply

Question 3

in the classical model, what will a rise in aggregate demand in the short and long term lead to?

Answer 3

in the classical model, a rise in aggregate demand will in the short run lead to an increase in both output and prices, but in the long run the rise will generate only an increase in prices

Question 4

the long-run aggregate supply curve shows the supply curve for the economy at what?

Answer 4

at full employment

Question 5

What do classical economists argue a rise in unemployment will lead to?

Answer 5

-classical economists argue that a rise in unemployment will lead rapidly to cuts in real wages.
-these cuts will increase the quantity demanded of labour and reduce the quantity supplied, returning the economy to full employment quickly and automatically.

Question 6

on the other hand, what do Keynesian economists argue a rise in unemployment will lead to?

Answer 6

-on the other hand, Keynesian economists argue that money wages are sticky downwards.
-workers will refuse to take money wage cuts and will fiercely resist cuts in their real wage.
-the labour market will therefore not clear expect perhaps over a very long period of time, so long that it is possibly even not worth considering.

Question 7

in the classical model, what will a rise in aggregate demand lead to?

Answer 7

it will lead to a rise in the price level but no change in real output in the long run.
-in the classical model, no amount of extra demand will raise long run equilibrium output. This is because the long run aggregate supply curve shows the maximum productive capacity of the economy at that point in time

Question 8

what does a rise in long-run aggregate supply mean?

Answer 8

it means that the potential output of the economy has increased.

Question 9

when might rises in long-run aggregate supply which are unlikely to shift the aggregate demand curve occur?

Answer 9

rises in long-run aggregate supply which are unlikely to shift the aggregate demand curve might occur if, for instance, incentives to work increased or there was a change in technology

Question 10

in the classical model, what will an increase in long-run aggregate supply lead to?

Answer 10

will lead to both higher output and lower prices

Question 11

in the Keynesian model, what will a increase in aggregate supply lead to?

Answer 11

in the Keynesian model, an increase in aggregate supply will both increase output and reduce prices if the economy is at full employment