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AS-AD Equilibrium
- 3. Macroeconomic Equilibrium Definition: Macroeconomic equilibrium occurs when the demand-side of the economy and supply-side of the economy equal each other Where AD = AS - The intersection of the AS & AD curves At this point, there will be no tendency to move along any of the curves, hence no ∆PL, no ∆Y Everything that has been produced by firms, has been purchased and consumed by households. There is no excess demand or excess supply LRAS RNO Price Level YFEY PL Keynesian Long Run Equilibrium: AD LRAS RNO Price Level YFE PL Classical Long Run Equilibrium: AD SRAS RNO Price Level Y PL Short Run Equilibrium: AD
- 4. Short Run Equilibrium AS-AD Equilibrium Mr O’Grady
- 5. Short Run Equilibrium Definition: Where AD meets SRAS. The price level (PL) and real national output (Y) won’t change should the AD and SRAS curves remain stationary This level of output is not at YFE (unless by coincidence) Changes to short run equilibrium: are caused by a shift to AD (a change to one of AD’s component factors), a shift to SRAS (a change in the CoP), or a change to both SRAS RNO Price Level Y PL AD SRAS1 SRAS RNO Price Level YA PLA YBYC PLC PLB AD 1 AD Output Gaps: the difference between the actual level of national output (Y – short run equilibrium) and the estimated potential level (YFE) Negative output gap: actual GDP < potential GDP Positive output gap: actual GDP > potential GDP Key Question: How can there be a positive output gap? Potential output is the maximum level of output an economy can produce sustainably into the long run It is therefore temporarily possible to produce above YFE, as we overwork our resources beyond their sustainable level SRAS H SRAS L RNO Price Level YFE YHYL +ve Output Gap -ve Output Gap AD H AD L
- 6. Classical Long Run Equilibrium AS-AD Equilibrium Mr O’Grady
- 7. Classical Long Run Equilibrium Definition: Where AD meets LRAS. The price level (PL) and long run (potential) national output (YFE) won’t change should the AD and LRAS curves remain stationary This level of output is always at YFE if the LRAS is classical Changes to long run equilibrium: are caused by a shift to AD (a change to one of AD’s component factors), a shift to LRAS (a change in the FoP), or a change to both Classical economists: advocate and support economic policies that improve long-run aggregate supply That is not to say that aggregate demand is unimportant But, if AD increases with no attention given to improving the quality and quantity of factor resources, inflation will occur and damage economic growth LRAS RNO Price Level YFE PL AD LRAS1LRAS RNO Price Level PLA YBYA PLC PLB AD 1 AD
- 8. Keynesian Long Run Equilibrium AS-AD Equilibrium Mr O’Grady
- 9. Keynesian Long Run Equilibrium Definition: Where AD meets LRAS. The price level (PL) and long run national output (Y) won’t change should the AD and LRAS curves remain stationary This level of output can be at YFE if AD is high, but unemployment can also persist and the long run level of output can be below potential too Changes to long run equilibrium: are caused by a shift to AD (a change to one of AD’s component factors), a shift to LRAS (a change in the FoP), or a change to both Keynesian economists: advocate and support economic policies to improve and manage aggregate demand That is not to say long-run aggregate supply is unimportant But, if the economy is operating significantly below its full potential e.g. in a recession, they would focus attention on policies to stimulate the components of AD (C, I, G, X, M) LRAS RNO Price Level YFEY PL AD LRAS LRAS1 RNO Price Level YFE A PL YFE B = Different Equilibria AD AD 1
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