Macroeconomic Equilibrium

Question 1

Where is the equilibrium?

Answer 1

Where AD crosses AS

Question 2

What happens in the short run?

Answer 2

Increase in AD, new equilibrium and price level
Increased output, increase in derived demand - jobs created - unemployment reduced
Rise in prices - demand pull inflation

decrease will have the opposite effect

Question 3

What happens in the long run?

Answer 3

AD shifts but output level doesn’t change (unemployment can’t fall) - economy is at full capacity
prices rise - demand pull inflation

Question 4

In both the short and long run what happens?

Answer 4

Price levels rise - possibly a worsening balance of payments

Question 5

What needs to happen to improve all four macroeconomic indicators at the same time?

Answer 5

Increase in LRAS

Question 6

What can limit the Multiplier?

Answer 6

Amount of Spare Capacity - if supply is struggling to keep up with demand, then the multiplier effect after an increase in AD will be small

Question 7

When AS is elastic how much spare capacity is there?

Answer 7

A lot, after an initial injection the multiplier will take effect and give a larger rise in output

Question 8

When AS is inelastic, how much spare capacity is there?

Answer 8

A lot less available, the same initial shift cannot be multiplied, so a smaller rise in output but a larger rise in prices (inflation)

Question 9

Shifts in AS do what to the macroeconomic indicators?

Answer 9

Affects them all in the same way at the same time. Worsening or improving them