LS6- Equilibrium Levels Of National Output

Question 1

What is equilibrium level of output?

Answer 1

When AD and AS curves intersect in the short run

Question 2

What do classical economists say?

Answer 2

LRAS is vertical so long run equilibrium occurs when AD intersects LRAS
There can never be unemployment in the long run
A rise in unemployment leads to a cut in real wages which increases demand of labour decreases its supply to return back to full employment

Question 3

What do Keynesian economists say?

Answer 3

LRAS is not vertical
Equilibrium can be reached below full employment
Wages are sticky downwards so cuts are resisted, meaning that labour markets won’t clear over a short period of time

Question 4

Interaction in classical?

Answer 4

If AD shifts right there is a movement up SRAS and output increases(and price a little)
Leads to short run equilibrium but long run disequilibrium (beyond max capacity)
So SRAS shifts left as FOS are more scarce and expensive
Real output falls and price rises

So in the long run, long run disequilibrium is corrected and an increase in AD only leads to a rise in PL

Question 5

Interaction in Keynesian

Answer 5

Increase in AD is purely inflationary at full employment but in a depression it leads to a rise in output and price

Question 6

What happens if there is a change in LRAS

Answer 6

For classical, output rises and price falls for same AD

For Keynesian output rises but price falls at full employment. Below full employment there is less of a change