Macroeconomic Equilibrium Test – Flashcards
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Differentiate between short run and long run macroeconomic equilibrium
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Short run equilibrium is when short run aggregate supply equals aggregate demand. Long Run equilibrium occurs when long run aggregate supply equals aggregate demand.
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With help of a diagram, explain the NeoClassical perspective of long run macroeconomic equilibrium
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They believe that the economy will always move towards its long run equilibrium at the full employment level of output with no government interference
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Diagram + explain the Keynesian perspective of long run macroeconomic equilibrium
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Keynesians believe that the equilibrium level of output may occur at different levels; they believe that an economy may be in long-run equilibrium at a level of output below the full employment level of national income
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Diagram + explain difference between equilibrium level of national income and full employment level of output can result in an inflationary gap
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increase in price level without an increase in output; increase in AD cannot be satisfied with existing resources so the price level rises to allocate the scarce resources
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Diagram + explain how the difference between equilibrium level of national income and the full employment level of output can result in a deflationary gap
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occurs when the level of aggregate demand is not enough to buy up the potential output that could be produced if the economy was at a full level of output
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Diagram + explain concept of an output gap
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negative output (A) gap is below potential; positive output (B) gap is beyond long term potential
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Diagram + explain inflationary spiral
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rapid increase in average price level resulting from demand pull and cost push inflation working together
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Diagram + explain deflationary spiral
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a deflationary pattern in which falling prices cause a business slow-down, which in turn leads to lower wages, a further fall in prices, and even less business activity
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With the help of a diagram, explain who might argue for the use of supply side management policies to improve the economy of a country. Explain why these policies would be attractive and under what conditions these policies would be used. Also explain what types of supply side management policies would be available for implementation and explain the anticipated economic results. Describe the possible negative outcomes to such actions.
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(draw Neoclassical equilibrium curve)
Neoclassicals believe that a country will use supply-side policies to increase the quantity or quality of the factors of production; they do this to increase the rate of economic growth and to increase to full level of employment; by giving subsidies they can increase employment; negative outcome is that it might take a long time to have an effect on the economy and it is costly to implement
