| What is Macroeconomic Equilibrium? | -This is when the AD and AS Curves Intersect. Just like Demand and Supply on the Free Market |
| AD and SRAS Diagram
-AD Shifts to the Right. Explain what has Happened and will happen? | -When AD Increases to AD2, a New Equilibrium will be setup at a higher Real GDP and Price Level
-More Output then means more Labour [Derived Demand] leading to less Inflation
-But the Higher Prices means that 'Demand-pull Inflation' has Occurred
-The Opposite [AD Falling] is True [Unemployment Up, Output down, but Inflation down] |
| AD and LRAS Diagram
-AD Shifts to the Right. Explain what has Happened and will happen? | -AD2 will have the Same Equilibrium Point at the Same Output of the Old Equilibrium ,but just at a Higher Price
-This is because the LRAS is the Maximum Output the Economy can Produce. So all that happens is Demand Pull Inflation occurs
-Unemployment also doesn't Exist since being on the LRAS means there is no Spare Capacity in the Economy |
| In terms of Spare Capacity, what state is it in when:
1. AS is Very Elastic
2. AS is Very Inelastic | 1. AS being Elastic means there is Lots of Spare Capacity in the Economy. After an Injection [AD Shifts Right] the Multiplier takes hold to make a Large Rise in Output
2. AS being Inelastic means there is Little Spare Capacity in the Economy. So after an Injection there will be a Small Rise in Output, but much Greater in Prices |
| How can a Shift in the AS [With a Macroeconomic Equilibrium Diagram] to the Right affect all 4 Macroeconomic Performance Positively?
-Is the Opposite True? | -If the AS increases from SRAS to SRAS1 then:
-The Economy will Grow to the New Output [Y1]
-The new Output means more Employment [Derived Demand]
-Prices also will Fall so Inflation becomes Lower
-Economy becomes more Competitive [From Prices falling] so Exports can Increase
-The Opposite is True. SRAS going Left will Worsen all 4 |
| How can a Shift in the LRAS to the Right affect all 4 Macroeconomic Performance Positively?
-Is the opposite True? | -LRAS Increasing can lead to:
-Economic Growing to the new LRAS Vertical Line
-Employment stays at 100% so no Chance [LRAS means no Spare Capacity, like Unemployment]
-Price Level will Fall and thus Balance of Payments [Exports] will be Better off
-The Opposite is True. LRAS going Left worsens all 4 |
| Explain what happens when AD increases with a Keynesian AS Curve | -AD Increasing can lead to Different outcomes, depending where the AD originally Started from.
-If AD started when the LRAS was Perfectly Elastic, then an Increase means that Output Rises while Prices remains the Same. This suggests the Economic is in Depression
-If AD started when the LRAS was Curving, then an Increase means both Output and Prices rise. Suggests the Economy is below Full Capacity
-If AD Rises when its Perfectly Inelastic, only Price will Rise. This suggests the Economy is in Full Capacity. |
