MACROECONOMIC EQUILIBRIUM Flashcards
Define Macroeconom Equilibrium
Absolutely! Here are some clear and useful notes on macroeconomic equilibrium, tailored for exam revision:
Macroeconomic Equilibrium
Definition:
Macroeconomic equilibrium occurs when aggregate demand (AD) equals aggregate supply (AS). This is the point where the total demand for goods and services in an economy matches the total output produced.
Short-Run Equilibrium
- Occurs when AD = short-run aggregate supply (SRAS)
- Prices and wages are sticky (don’t adjust immediately)
- Output can be above or below full employment (i.e. output gap exists)
Long-Run Equilibrium
- Occurs when AD = long-run aggregate supply (LRAS)
- The economy operates at full employment or potential GDP
- Prices and wages are flexible; no output gap
Disequilibrium Situation - Inflatiionary Gap
- Actual output > potential output
- High demand pushes prices up
- Leads to inflationary pressure
Disequilibrium Siituation - Recessionary Gap
- Actual output < potential output
- Economy underperforms; unemployment rises
What are the factors that shift AD?
- changes in consumer confidence
- government spending
- interest rates
- exchange rates
- net exports
What are the factors that shift AS?
- input costs (e.g. oil prices)
- productivity changes
- technology
- supply shocks (natural disasters, pandemics)
Fiscal Policy to restore equilibrium
- government increases spending or cuts taxes to boost AD
- decreases spending ot raises taxes to reduce AD
Monetary Policy to restore equilibrium
- central bank adjusts interest rates or money supply
- lower interest rates > higher investment > higher AD
Supply-Side Policies to restore equilibrium
- improve productivity, labor market efficiency, innovation
Equilibrium on the AD-AS Diagram
Intersection point of AD and AS curves.
If AD shifts right (increase), equilibrium output and price level rise (demand-pull inflation).
If SRAS shifts left (decrease), equilibrium output falls and price level rises (cost-push inflation).
