2.4.3 Equilibrium levels of real national output

• What is macroeconomic equilibrium?

  Its whenshort run aggregate supply (SRAS) is equal to aggregate demand

  Everything has been produced by firms, has been purchased and consumed by households

  In macro-economic equilibrium there is no excessdemand or excess supply
• Key Characteristics of Macroeconomic equilibrium

  Price Stability:Prices are stable, with no inflationary or deflationary pressures.

  Full Employment:The economy operates at full employment, meaning all available resources are utilized efficiently.

  Sustainable Output:The output level is sustainable in the long run without causing imbalances.
• When does macroeconomic equilibrium occur?


  It occurs when the demand-side of the economy and supply-side of the economy equal each other
• Keynesian view on macroeconomic equilibrium

  Keynesian economists would advocate and

  support economic policies that improve and

  manage aggregate demand

  
  

  If the economy is operating significantly

  below its full potential e.g. in a recession,

  Keynesian economists would focus attention

  on policies that stimulate the components of

  AD
• Classical view on macroeconomic equilibrium

  Classical economists would advocate and support

  economic policies that improve long-run aggregate

  supply

  
  

  If AD increases with no attention given to improving

  the quality and quantity of factor resources, inflation

  will occur and damage economic growth
• How Shifts in AD Cause Changes in the Equilibrium Price Level and Real National Output

  Increase in AD:Caused by factors such as higher consumer confidence, increased government spending, or tax cuts.

  Results in a rightward shift of the AD curve.

  Leads to a higher price level (inflation) and an increase in real national output.
• How Shifts in AD Cause Changes in the Equilibrium Price Level and Real National Output - 2

  Decrease in AD:Caused by factors such as reduced consumer spending, lower government expenditure, or higher taxes.

  Results in a leftward shift of the AD curve.

  Leads to a lower price level (deflation) and a decrease in real national output.
• How Shifts in AS Cause Changes in the Equilibrium Price Level and Real National Output

  Increase in AS:Caused by factors such as technological advancements, reduction in production costs, or improvements in labour productivity.

  Results in a rightward shift of the AS curve.

  Leads to a lower price level and an increase in real national output.
• How Shifts in AS Cause Changes in the Equilibrium Price Level and Real National Output - 2

  Decrease in AS:Caused by factors such as natural disasters, increased production costs, or labor strikes.

  Results in a leftward shift of the AS curve.

  Leads to a higher price level and a decrease in real national output.
• What does the AD curve represent?

  It represents the total quantity of goods and services demanded at different price levels.
• What does the AS curve represent?

  It represents the total quantity of goods and services that producers are willing and able to supply at different price levels.