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 to the left, 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 an economy is already operating at max employment, cannot any further produce sustainably.
Shift right in AD -> meets SRAS outside LRAS -> disequilibrium
Economy operating at 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 doesn’t affect price level, as now new resources are brought in, the unused resources start to get used

At full employment: increase in AD- increases in price level, doesn’t effect output as economy is already at maximum output i.e. the price rise is purely inflationary

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 in LRAS- productive potential of the economy has increased- incentive to work/advancements in technology
LRAS shifts to the 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- productivity 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