MACRO - LS6 - Equilibrium Levels Of Real National Output

Question 1

What’s the equilibrium level of real national output?

Answer 1

Where the AD & AS curve intersect

Question 2

What do Keynesian and classical economists agree on

Answer 2

The AD curve is downward sloping and the SRAS curve is upward sloping

Question 3

What causes AD to shift

Answer 3

• a change in any component of AD
• a fall in interest rates - causes consumption/investment to increase
• fall in exchange rate - increase exports and decrease imports
• lowering of income tax - increases consumption as more disposable income

Question 4

What does a rise in AD lead to in short run

Answer 4

Increase in both real output and price level in the short run

Question 5

What causes a shift in SARS

Answer 5

changes in the costs of production:
- wages of workers rising
- increase in raw materials
- taxes on goods/services may be increased/decreased

Question 6

What does a fall in SARS lead to

Answer 6

A fall in output but rise in price

Question 7

Long run equilibrium

Answer 7

Occurs when LARS intersects with AD

Question 8

Main difference between Keynesian and classical LARS

Answer 8

Disagree about the extent to which workers react to unemployment by accepting real wage cuts
classical
Argue rise in unemployment with lead quickly to cuts in real wages which increase quantity of labour demanded and reduce quantity supplied, returning to full employment quickly and automatically
keynesian
Believe money wages are sticky downwards, will refuse to take pay cuts (maybe due to national minimum/trade unions). The labour market will not clear except over a very long period of time

Question 9

Rise in AD leads to (classical)

Answer 9

Increase in price but not quantity (inflationary)

• leads to increase in SARS and disequilibrium first

Question 10

Long run disequilibrium

Answer 10

Temporary imbalance between demand & supply resulting in price fluctuations

Question 11

Rise in AD leads to (Keynesian)

Answer 11

Depends where
Could lead to increase in quantity without price
Or quantity and price
Or just price if at max capacity

Question 12

What does increase in LRAS (classical) lead to

Answer 12

Increase in output and decrease in price

Question 13

When would LRAS increase but not AD

Answer 13

If incentives to work increased
Change in tech

Question 14

What does an increase in LRAS lead to (Keynesian)

Answer 14

• if at full employment, output increases, decrease price
• if at slightly less then full employment, output increases, decrease price
• no effect in depression

Question 15

What’s the only shift that can move economy out of depression

Answer 15

Increase in AD

Question 16

Factors that can cause an increase in AD & LRAS

Answer 16

Investment

Question 17

What’s the effect of an increase in AD & LARS

Answer 17

First AD will shift causing an increase in price & output - will be in LRAS disequilibrium
Then LRAS increases causing price to drop and output to increase - equilibrium - causes SRAS to shift as investment assumes reduced production costs

Question 18

When will investment not cause a shift in LRAS & AD

Answer 18

• if goes into receivership - will only cause AD to increase - inflationary
• poorly directed investment - AD increase may be larger then LRAS