Equilibrium levels of real national output

Question 1

What is equilibrium real national output?

Answer 1

This is where the AD and SRAS curves intersect.

Question 2

What is equilibrium output?

Answer 2

Equilibrium output means output is stable (until a variable changes) over a period of time.

Question 3

What is national output?

Answer 3

This is the total output in the country over a period of time e.g. a year.

Question 4

What is real national output?

Answer 4

This is the output after inflation has been deducted. Inflation tends to overstate figures, so this is deducted to give the actual output over a period of time.

Question 5

What is the effect of an increase in AD on the equilibrium output?

Answer 5

The economy is initially in equilibrium where AD1 and SRAS 1 intersect. The output in the economy is at Y1 and the price level is at P1. An increase in AD will shift AD1 to the right making it AD2. The price level has increased from P1 to P2 due to an increase in AD. Businesses have been able to increase the average level of prices in the economy. The price level has increased but wages and material costs have remained constant. Businesses can make a higher profit per unit so will increase output from Y1 to Y2.

Question 6

What is the effect of an increase in costs on the equilibrium output?

Answer 6

The economy is initially at equilibrium where AD1 intersects with SRAS1. The output is at Y1 and the price levels is at P1. An increase in short run businesses costs, caused by for an increase in oil prices, will shift with the SRAS curve to the left from SRAS1 to SRAS2. Business costs have increased therefore they increase their average prices from P1 to P2 to maintain the same profit margin. As businesses increase their prices, they must decrease their output from Y1 to Y2 because consumers have to buy fewer goods and services with same income.