2.4 Macroeconomic Equilibrium
By the end of this unit you should be able to:
- Explain, using a diagram, the determination of short-run equilibrium, using the SRAS
- Examine, using diagrams, the impacts of changes in short-run equilibrium.
- Explain why, in the monetarist/new classical approach, while there may be short-term fluctuations in output, the economy will always return to the full employment level of output in the long run.
- Explain, using the Keynesian AD/AS diagram, that the economy may be in equilibrium at any level of real output where AD intersects AS.
- Explain, using a diagram, that if the economy is in equilibrium at a level of real output below the full employment level of output, then there is a deflationary (recessionary) gap.
- Discuss why, in contrast to the monetarist/new classical model, the economy can remain stuck in a deflationary (recessionary) gap in the Keynesian model.
- Explain, using a diagram, that if AD increases in the vertical section of the AS curve, then there is an inflationary gap.
- Discuss why, in contrast to the monetarist/new classical model, increases in aggregate demand in the Keynesian AD/AS model need not be inflationary, unless the economy is operating close to, or at, the level of full employment.
The AD/AS or aggregate demand/aggregate supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply. Macroeconomic equilibrium is an economic state in an economy where the quantity of aggregate demand equals the quantity of aggregate supply. Significant changes in either aggregate demand or aggregate supply will have important effects on price, unemployment, and inflation.