Study Notes
Macroeconomic equilibrium occurs when aggregate demand equals aggregate supply, determining the price level, real GDP, and employment levels. In the short run, changes in AD or AS can shift equilibrium, affecting output and price levels. In the long run, the new classical model suggests the economy self-adjusts to full employment. The Keynesian model emphasizes the role of government intervention to address gaps.
- Macroeconomic Equilibrium — the point where aggregate demand equals aggregate supply. Example: AD = AS determines price level and real GDP.
- Inflationary Gap — occurs when actual output exceeds potential output. Example: Y > Yf, leading to lower unemployment.
- Deflationary Gap — occurs when actual output is less than potential output. Example: Y < Yf, leading to higher unemployment.
- Monetarist/New Classical Model — suggests the economy self-corrects to full employment. Example: AD and SRAS intersect on the LRAS curve.
- Keynesian Model — emphasizes government intervention to manage economic gaps. Example: AD and Keynesian LRAS intersect for equilibrium.
Exam Tips
Key Definitions to Remember
- Macroeconomic Equilibrium
- Inflationary Gap
- Deflationary Gap
- Monetarist/New Classical Model
- Keynesian Model
Common Confusions
- Confusing short-run and long-run equilibrium impacts.
- Misunderstanding the role of government intervention in Keynesian vs. New Classical models.
Typical Exam Questions
- What is macroeconomic equilibrium? It is the point where aggregate demand equals aggregate supply.
- How does an increase in AD affect the economy in the short run? It results in higher real output and price levels, creating an inflationary gap.
- What is the difference between the Keynesian and New Classical models? The Keynesian model supports government intervention, while the New Classical model relies on self-correction.
What Examiners Usually Test
- Understanding of short-run vs. long-run equilibrium.
- Ability to explain inflationary and deflationary gaps.
- Differences between Keynesian and New Classical models.