macroeconomic equilibrium Flashcards
when does real national output equilibrium occur ?
occurs where aggregate demand (AD) intersects with short-run aggregate supply (SRAS)
draw the classic short run equilibrium
diagram analysis
This economy is in short run equilibrium at AP1Y1
Any changes to the components of AD will cause the AD curve to shift left or right, creating a new short-run equilibrium
Any changes to the determinants of SRAS will shift the SRAS curve left or right, creating a new short-run equilibrium
what do free market economists believe ?
Free market economists believe that the economy will always return to its normal capacity level of output
In the short-run, there will be fluctuations around this capacity level of output
In the long-run, the economy will return to this normal capacity level of output, but perhaps at a different average price level
what is the long run macro economic equilibrium used to identify ?
Long-run macroeconomic equilibrium as it is used to identify positive and negative output gaps in an economy
draw long run macroeconomic equilibrium
diagram analysis
The LRAS curve demonstrates the normal capacity level of output of the economy using all of its scarce resources
The SRAS intersects with AD at the LRAS curve
This economy is producing at the full employment level of output (YFE)
The average price level at YFE is AP1
draw a increase in AD diagram ?
diagram analysis
The initial equilibrium level of output was at AP1Y1
An increase in one of the components of AD (e.g. consumption) causes the AD to increase AD1→AD2
Average prices in the economy rise to AP2 and the real level of output increases to Y2
The new short-run equilibrium is at AP2Y2
show an increase in short run aggregate supply
diagram analysis
The initial equilibrium level of output was at AP1Y1
This equilibrium represents a negative output gap equal to Y1YFE
An increase in one of the determinants of SRAS (e.g. productivity) causes the SRAS to increase SRAS1→SRAS2
Average prices in the economy fall to AP2 and the real level of output increases to Y2
The new short-run equilibrium is at AP2Y2
There is still a negative output gap but it is smaller (Y2YFE)
what is an economic shock
An economic shock is an unpredictable event that has macroeconomic consequences
They can have widespread positive or negative impacts on economic growth, inflation rate, unemployment levels
what is a demand side shock
Demand side shock: typically involves a sudden change in the levels of private spending, as seen in shifts in consumer spending or business investment
what is a supply side shock
Supply side shock: When production across an economy is made more difficult
what do both demand and supply side shocks experience ?
Both demand and supply side: the economy faces challenges on both the consumption and production fronts
