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Equilibrium

Equilibrium. By J.A. SACCO. Equilibrium. Recall- Intersection of demand and supply * More complicated because of the two aggregate supply curves- but the concept is the same If the price level – Excess quantity of real goods/services. AS>AD. Result is suppliers drop the price

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Equilibrium

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  1. Equilibrium By J.A. SACCO

  2. Equilibrium • Recall- Intersection of demand and supply • * More complicated because of the two aggregate supply curves- but the concept is the same • If the price level – Excess quantity of real goods/services. AS>AD Result is suppliers drop the price which will create greater quantity of aggregate demand

  3. LRAS SRAS At price level 140 AS>AD and the price level falls. AD Equilibrium 140 120 Price Level 100 0 1 2 3 4 5 6 7 8 9 10 Real GDP per Year ($ trillions)

  4. Equilibrium • If the price level -Quantity of AD would be greater than quantity of AS. Result is because of the shortage buyers will bid up price which will result in suppliers increasing the quantity supplied. AD>AS

  5. LRAS SRAS At price level 100 AD>AS and the price level increases. AD Equilibrium 140 120 Price Level 100 0 1 2 3 4 5 6 7 8 9 10 Real GDP per Year ($ trillions)

  6. LRAS SRAS At price level 120 AD=AS. AD Equilibrium 140 120 Price Level 100 0 1 2 3 4 5 6 7 8 9 10 Real GDP per Year ($ trillions)

  7. Two Types of Equilibrium • What is the state of the economy in the model to the right? • What is meant by long run equilibrium? Draw an example? • What is meant by short run equilibrium? Draw an example? • Which equilibrium is most important? If the economy is at full equilibrium, this doesn’t mean the economy will stay there . Economic “shocks” occur that may shift the curves.

  8. Consequences of Changes in Aggregate Supply and Demand • Shift in curves. The effect is the price level or real GDP may change or both. • Gives insight into inflation or recessions. • Aggregate Demand Shock • Any shock that causes the aggregate demand curve to shift inward or outward. • Aggregate Supply Shock • Any shock that causes the aggregate supply curve to shift inward or outward. How does this effect the economy?

  9. Consequences of Changes in Aggregate Supply and Demand • Contractionary Gap • Exist whenever the equilibrium level of real national income is less than the full-employment level

  10. LRAS SRAS 120 E1 Contractionary Gap 115 E2 AD1 AD2 6.8 7 6.5 The Effects of Stable Aggregate Supplyand a Decrease in Aggregate Demand:The Contractionary Gap Price Level 0 Real GDP per Year ($ trillions)

  11. Consequences of Changes in Aggregate Supply and Demand • Expansionary Gap • Exist whenever the equilibrium level of real national income is greater than the full-employment level

  12. LRAS SRAS 120 E1 AD1 7 The Effects of Stable Aggregate Supplyand an Increase in Aggregate Demand:The Expansionary Gap Price Level 0 Real GDP per Year ($ trillions)

  13. LRAS SRAS 120 AD2 AD1 7 7.6 The Effects of Stable Aggregate Supplyand a Increase in Aggregate Demand:The Expansionary Gap Price Level E1 0 Real GDP per Year ($ trillions)

  14. LRAS SRAS E2 125 120 AD2 7 7.2 7.6 Expansionary Gap The Effects of Stable Aggregate Supplyand a Increase in Aggregate Demand:The Expansionary Gap 120 Price Level E1 AD1 0 Real GDP per Year ($ trillions)

  15. Explaining Inflation:Demand-Pull or Cost-Push? • Demand-Pull Inflation • Inflation caused by increases in aggregate demand not matched by increases in aggregate supply • Whenever the general level of prices rise because of continual increase in AD • Could occur when the amount of money in circulation increases faster than the growth of the economy

  16. LRAS SRAS E2 125 120 E1 AD2 Demand-Pull Inflation AD1 7 7.2 The Effects of Stable Aggregate Supply and an Increase in Aggregate Demand: Demand-Pull Inflation Price Level 0 Real GDP per Year ($ trillions) Intersection of AD2 and SRAS shows an increase in the price level.

  17. Explaining Inflation:Demand-Pull or Cost-Push? • Cost-Push Inflation • Inflation caused by a continually decreasing short-run aggregate supply curve. • Caused by an increase in costs of inputs which decreases SRAS. STAGFLATION!

  18. LRAS SRAS2 SRAS1 E2 125 120 E1 Cost-Push Inflation AD1 6.8 7 The Effects of Stable Aggregate Demand and a Decrease in Aggregate Supply: Supply-Side Inflation Price Level 0 Real GDP per Year ($ trillions)

  19. LRAS SRAS2 SRAS1 E2 120 115 E1 AD1 2.8 3.0 The Oil PriceShock of the 1970s SRAS shifted leftward due to the restrictions placed on the supply of oil to the U.S. Price Level 0 Real GDP per Year ($ trillions)

  20. The Oil PriceShock of the 1970s • Question • What would have happened to the LRAS if the price of oil had remained permanently high?

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