Short-Run Equlibrium

Question 1

What is the short-run equilibrium?

Answer 1

The equilibrium level of output occurs when aggregate demand intersects aggregate supply

Question 2

What are the 3 types of short-run equilibriums?

Answer 2

1. Short-run equilibrium at full employment level
2. Recessionary gap
3. Inflationary gap

Question 3

What is a recessionary gap?

Answer 3

Situation where real GDP is less than potential GDP.

• causes by decrease in demand
• demand is less than potential GDP
• unemployment is higher than natural rate (as there is reduced production)
• price level is lower than price level if producing at potential GDP

Question 4

What is an inflationary gap?

Answer 4

When real GDP is greater than potential GDP

• caused by increase in demand
• demand is more than potential GDP
• unemployment is lesser than natural rate
• price level is higher than if producing at potential output

Question 5

What is the short-run equilibrium at full employment level?

Answer 5

Real GDP = Potential GDP

• no deflationary or inflationary gap
• unemployment = natural rate
• price stability and economic growth

Question 6

What is stagflation?

Answer 6

Fall in short-run aggregate supply leads to an increase in price level and a decrease in real GDP