Macro 6 - Macroeconomic Equilibrium Flashcards
When does macroeconomic equilibrium occur?
Macroeconomic equilibrium occurs when aggregate demand and aggregate supply are equal
What happens when equilibrium occurs?
Total domestic output and the price level will be stable
What happens if Aggregate demand exceeds aggregate supply?
Shortage
What happens if aggregate supply exceeds aggregate demand?
Excess supply
What happens to Output, unemployment and the Price level when AD shifts to the right
Output: Increases from Y1 to Y2
Unemployment: Decreases because labour is a form of derived demand
Price level: Increases due to excess demand for goods and services
what factor dictates whether Aggregate demand is good for an economy or not?
Spare capacity
How does spare capacity dictate whether AD is good for the economy or not?
If there is an increase in Aggregate Demand but lots of Spare Capacity, then there will be little inflation
If approaching full capacity, it would impact inflation more than growth
Why is there likely to be unemployment if AS grows faster than AD?
Excess supply of Goods + Services, prices fall, labour is derived demand and there is little demand so firms pay off labourers.
What happens when AD rises more quickly than AS?
Excess demand and not enough supply.
Increased prices due to firms profit incentive
How would a fall in size of the labour force affect AD?
AD would decrease
How would an increase in interest rates affect AD?
Ad would decrease
How would technological advancement affect AS?
AS will increase
How would a decrease in income tax affect AD?
AD will increase.
Define productivity
Output per worker in a given time.
