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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

Equilibrium

By J.A. SACCO

equilibrium1
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

equilibrium2

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)

equilibrium3
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

equilibrium4

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)

equilibrium5

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)

two types of equilibrium
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.

consequences of changes in aggregate supply and demand
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?

consequences of changes in aggregate supply and demand1
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
the effects of stable aggregate supply and a decrease in aggregate demand the contractionary gap

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)

consequences of changes in aggregate supply and demand2
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
the effects of stable aggregate supply and an increase in aggregate demand the expansionary gap

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)

the effects of stable aggregate supply and a increase in aggregate demand the expansionary gap

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)

the effects of stable aggregate supply and a increase in aggregate demand the expansionary gap1

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)

explaining inflation demand pull or cost push
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
the effects of stable aggregate supply and an increase in aggregate demand demand pull inflation

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.

explaining inflation demand pull or cost push1
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!

the effects of stable aggregate demand and a decrease in aggregate supply supply side inflation

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)

the oil price shock of the 1970s

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)

the oil price shock of the 1970s1
The Oil PriceShock of the 1970s
  • Question
    • What would have happened to the LRAS if the price of oil had remained permanently high?