3.2 Short-run equilibrium

Question 1

when is an economy in equilibrium? (what is macroeconomic equilibrium?)

Answer 1

economies are in equilibrium when the injections into and the leakages out of the circular flow of income are equal. However, there are other ways to determine the equilibrium in an economy.

An economy is in equilibrium when the domestic income equals the domestic output, which equals the domestic expenditure. In other words, another way to find equilibrium is by equating aggregate demand (AD, domestic expenditure) and aggregate supply (SRAS: domestic output).

In that situation, at a particular price level, the total value of planned expenditure on domestically produced final goods and services will match the total value of all planned output of final goods and services produced in that country. Producers would not have an incentive to change output. This situation is called macroeconomic equilibrium.

Question 2

short run macroeconomic equilibrium

Answer 2

Short-run macroeconomic equilibrium can be illustrated as on the diagram, where the AD and SRAS curves are intersecting at APL1 and Y1 or Ye. Rather than straight curves, bowed curves are sometimes also used.
The diagram shows that at APL1, the economy is in equilibrium and would produce Ye in real GDP. As long as none of the determinants of AS or AD change, there would be no change in the level of this macroeconomic equilibrium.