Macroeconomic Equlibrium Flashcards
(13 cards)
What is macroeconomic equilibrium?
It occurs when Aggregate Demand (AD) = Aggregate Supply (AS).
In the Classical model, what are the two types of macroeconomic equilibrium?
Short-run equilibrium and long-run equilibrium.
When does short-run equilibrium occur in the Classical model?
When AD = SRAS (Short-Run Aggregate Supply), but this may not equal LRAS (Long-Run Aggregate Supply).
What is long-run equilibrium in the Classical model?
When AD = SRAS = LRAS, meaning the economy is operating at full employment (Yfe).
What is a recessionary gap?
When AD = SRAS is less than LRAS. The economy is underproducing (below Yfe), leading to unemployment.
What is an inflationary gap?
When AD = SRAS is greater than LRAS. The economy is overproducing (above Yfe), which is unsustainable.
Why can an inflationary gap not persist in the long run?
Overuse of resources (e.g., overtime, capital burnout) leads to rising costs and eventually shifts SRAS leftward back to long-run equilibrium.
What is long-run macroeconomic equilibrium in the Classical model?
It occurs when AD = SRAS = LRAS, meaning there are no output gaps, and the economy is at full employment (Yfe).
What are output gaps?
Differences between actual GDP and potential GDP (Yfe).
Negative gap (recessionary): Actual GDP < Yfe
Positive gap (inflationary): Actual GDP > Yfe
What does long-run equilibrium look like on a Classical AD/AS diagram?
AD, SRAS, and LRAS all intersect at the same point. The economy is stable with no pressure on prices or output.
In the Keynesian model, when can long-run equilibrium occur?
At any point where AD = LRAS—this includes points below full employment (on the horizontal section of the Keynesian LRAS curve).
Why is long-run equilibrium in the Keynesian model different?
The Keynesian LRAS is not vertical at all levels—it has a flat (horizontal) section where the economy can be in equilibrium with unemployment and unused capacity.
What does the Keynesian AD/AS diagram look like?
Horizontal section: High unemployment; AD increases don’t raise prices.
Upward-sloping section: Output increases raise prices gradually.
Vertical section: Full capacity; AD increases only raise prices, not output.
