Study Notes
The equilibrium level of real output in national income is determined by the intersection of aggregate demand and aggregate supply. In the short run, equilibrium occurs when total spending equals total production, affecting real GDP and price levels.
- Aggregate Demand — total spending in an economy Example: Includes consumption, investment, government spending, and net exports.
- Aggregate Supply — total production in an economy Example: Influenced by labor, capital, and technology.
- Macroeconomic Equilibrium — state where the economy is neither in a recessionary nor inflationary gap Example: Output matches potential output.
- Short-run Equilibrium — when aggregate demand equals aggregate supply in the short run Example: Determines real GDP and price levels.
- Long-run Equilibrium — when the economy operates at full employment with flexible prices and wages Example: Classical model assumes minimal government intervention.
- Classical Model — economic theory favoring self-correcting markets Example: Believes in full employment in the long run.
- Keynesian Model — economic theory emphasizing government intervention Example: Focuses on achieving full employment and stable prices.
Exam Tips
Key Definitions to Remember
- Aggregate Demand
- Aggregate Supply
- Macroeconomic Equilibrium
- Short-run Equilibrium
- Long-run Equilibrium
Common Confusions
- Confusing short-run and long-run equilibrium
- Misunderstanding the role of government intervention in Classical vs. Keynesian models
Typical Exam Questions
- What happens to real output and price level when investment increases in the classical model? Use a diagram to show the effect.
- How does a rightward shift in the AD curve affect real output and price level in the short run? Create a short-run AD/AS diagram.
- What is the impact of a rightward shift in the SRAS curve on real output and price level? Use a short-run AD/AS diagram.
What Examiners Usually Test
- Understanding of equilibrium concepts in different economic models
- Ability to analyze shifts in aggregate demand and supply using diagrams
- Differentiation between short-run and long-run effects on the economy