macro equlibrium

7/29/2019 Macro Equlibrium

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Macroeconomic Equilibrium

Short-Run Macroeconomic Equilibrium

Short-run macroeconomic equilibrium occurs when thequantity of real GDP demanded equals the quantity of realGDP supplied at the point of intersection of theAD curveand the SAS curve.


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Short-Run Equilibrium

occurs at point c.


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Long-Run Macroeconomic Equilibrium

Long-run macroeconomic equilibrium occurs when realGDP equals potential GDPwhen the economy is on itsLAS curve.


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Figure 23.9 illustrateslong-run equilibrium.

Long-run equilibrium

occurs where theAD andLAS curves intersect andresults when the moneywage has adjusted to putthe SAS curve through the

long-run equilibrium point.


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Economic Growth and

Inflation

Figure 23.10 illustrateseconomic growth andinflation.


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Economic Growth and

Inflation

Economic growth occursbecause the quantity oflabor grows, capital isaccumulated, andtechnology advances, allof which increase potential

GDP and bring a rightwardshift of the LAS curve.


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Economic Growth and

Inflation

Inflation occurs because thequantity of money growsfaster than potential GDP,which increases aggregatedemand by more than long-run aggregate supply.

TheAD curve shiftsrightward faster than therightward shift of the LAScurve.


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The Business Cycle

The business cycle occurs because aggregate demandand the short-run aggregate supply fluctuate but themoney wage does not change rapidly enough to keep realGDP at potential GDP.


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A below full-employmentequilibrium is anequilibrium in whichpotential GDP exceeds

real GDP.Figures 21.11(a) and (d)illustrate below full-employment equilibrium.

The amount by whichpotential GDP exceedsreal GDP is called arecessionary gap.


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A long-run equilibrium isan equilibrium in whichpotential GDP equals realGDP.

Figures 21.11(b) and (d)illustrate long-runequilibrium.


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An above full-employment equilibriumis an equilibrium in whichreal GDP exceeds

potential GDP.

Figures 21.11(c) and (d)illustrate above full-employment equilibrium.

The amount by which realGDP exceeds potentialGDP is called aninflationary gap.


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Figure 23.11(d) showshow, as the economymoves from one type ofshort-run equilibrium to

another, real GDPfluctuates around potentialGDP in a business cycle.


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Fluctuations in Aggregate

Demand

Figure 23.12 shows theeffects of an increase inaggregate demand.

Part (a) shows the short-run effects.

Starting at long-runequilibrium, an increase inaggregate demand shiftstheAD curve rightward.


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Demand

Firms increase productionand rise pricesamovement along the SAScurve.


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Demand

Figure 23.12(b) shows thelong-run effects.

Real GDP increases, theprice level rises, and in thenew short-run equilibrium,there is an inflationary gap.


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Demand

The money wage ratebegins to rise and short-run aggregate supplybegins to decrease.

The SAS curve shiftsleftward.

The price level rises andreal GDP decreases until ithas returned to potentialGDP.


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Supply

Figure 23.13 shows theeffects of a decrease inaggregate supply.

Starting at long-runequilibrium, a rise in theprice of oil decreasesshort-run aggregate supplyand the SAS curve shiftsleftward.


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Supply

Real GDP decreases andthe price level rises.

The combination ofrecession combined withinflation is calledstagflation.


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U.S. Economic Growth, Inflation, and

Cycles

Figure 23.14interprets the

changes in real GDPand the price leveleach year from 1963to 2003 in terms ofshiftingAD, SAS, andLAS curves.


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Cycles

From1963 to 2003:

Real GDP and

potential GDP grewfrom $2.8 trillion to$10.3 trillion.

The price level rose

from 22 to 105.

Business cycleexpansions alternatedwith recessions.


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Cycles

Economic Growth

Real GDP growth was rapid during the 1960s and 1990sand slower during the 1970s and 1980s.

Inflation

Inflation was the most rapid during the 1970s.

Business Cycles

Recessions occurred during the mid-1970s, 1982, 19911992, and 2001.

macro equlibrium

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