Equilibrium levels of real national output

Question 1

What does equilibrium national income look like on Classical AS?

Answer 1

• The short run
  equilibrium national
  output level is the output
  where AD = SRAS.
• The long run equilibrium
  level of national output
  is where the AD = LRAS,
  at Y1.

Question 2

Show increases in AD and SRAS on the Classical AS curve

Answer 2

• AD increases from AD1 to AD2.
  The equilibrium national output
  increases from Y1 to Y2. There is
  some demand-pull inflation as the
  price level rises from PL1 to PL2.
• SRAS increases from SRAS1 to
  SRAS2. The equilibrium national
  output increases from Y1 to Y2.
  The price level falls from PL1 to PL2
  suggesting some disinflation or
  deflation

Question 3

What does equilibrium national income look like on a Keynesian AS curve?

Answer 3

• Equilibrium national output
  level is the output where AD
  = AS at Y1.
• If AD is high enough then
  the equilibrium can be at
  the full employment level of
  income (where the AS is vertical)

Question 4

Show increases in AD and AS in the Keynesian AS curve

Answer 4

• AD increases from AD1 to AD2. The
  equilibrium
  national output increases from Y1 to
  Y2. There is some demand-pull
  inflation as the price level rises from
  PL1 to PL2.
• AS increases from AS1 to AS2. The
  equilibrium national output
  increases from Y1 to Y2. The price
  level falls from PL1 to PL2 suggesting
  some disinflation or deflation

Question 5

Explain how the multiplier effect works

Answer 5

The multiplier effect arises because one agent’s spending is another
agent’s income. When a spending project creates new jobs for
example, this creates extra injections of income and demand into a
country’s circular flow.

Question 6

Wha