Lesson 6 - Equilibrium Output

Question 1

What is macroeconomic equilibrium?

Answer 1

when injections are equal to leakages/withdrawals, or AD = AS

Question 2

What is short run equilibrium?

Answer 2

when SRAS = AD

Question 3

What is long run equilibrium?

Answer 3

when LRAS = AD

Question 4

What is the new classical view of equilibrium?

Answer 4

• markets can clear without government intervention due to changing prices in the long run
• accept that an economy can be out of equilibrium in the short run, since output can be above the productivity capacity for a short period of time (eg machines working 24 hours a day)
• however this pushes costs up long term, which shirts SRAS back to the left, and to equilibrium

Question 5

What is the Keynesian view of equilibrium?

Answer 5

• we can be above or below equilibrium in the long run
• if we are below, then there will be high unemployment
• if we are above, then there will be inflation and firms will suffer from supply constraints