LS6 - Macroeconomic Equilibrium

Question 1

Equilibrium in the Short Run

Answer 1

Where AD and AS curves meet
A rise in AD will shift the curve to the right, vice versa
A rise in AS will shift the curve down, vice versa

Question 2

Equilibrium in the Long Run

Answer 2

Where LRAS curve meets AD curve

Question 3

Effect of change in AD on Classical LRAS

Answer 3

A shift in AD affects price level, but not output, as economy is already operating at max employment, cannot produce any further sustainably
Shift right in AD –> meets SRAS outside LRAS –> DISEQUILIBRIUM –> economy operating over full employment, unsustainably, meaning SRAS will decrease, as firms find it harder to find labour, land, and raw materials, so SRAS shifts up –> now back to equilibrium, AD=SRAS=LRAS

Question 4

Effect of change in AD on Keynesian LRAS

Answer 4

Deep depression period: Increase in AD - increases output, but doesnt affect price level, as now new resources are brought in, the unused resources start to get used
At full employment: Increase in AD - increases price level, doesnt affect output, as econ is at max potential
Between two periods (bendy area): Increase in AD will increase both price level and output

Question 5

Shift in LRAS and EQ in Classical LRAS

Answer 5

Rise is LRAS - productive potential of economy has increased - incentive to work/advancements in technology
LRAS shifts to right, meets AD at a lower price level, EQ prices FALL, OUTPUT INCREASES

Question 6

Shift in LRAS and EQ in Keynesian LRAS

Answer 6

Rise in LRAS - productive potential of economy has increased - incentive to work/advancements in technology
LRAS curve shifts to right:
No change in deep depression period
Between FE and DD - Increase in output and fall in prices at EQ
At FE - Increase in output and fall in prices at EQ