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23.3 Macroeconomic Equilibrium - Coggle Diagram
23.3 Macroeconomic Equilibrium
Macroeconomic Equilibrium
Macroeconomic Equilibrium
Macroeconomic equilibrium occurs at intersection of the AD and AS curves
and determines the equilibrium values for real GDP and P; demand and supply behaviour are consistent
Two conditions must be met:
desired AE must be equal to actual GDP
considering aggregate supply; firms must want to produce prevailing level of GDP
Aggregate Demand Shocks
Aggregate Demand Shocks
shift in AD shock cause P and real GDP to move in same direction
B/C of AD shift; if AD shock is positive, so is P and real GDP
The Multiplier When P Varies
multiplier is smaller when AS curve is positively sloped B/C if an AD shock leads to a change in P level, ultimate change in real GDP will be
less than
what is predicted by simple multiplier
At first, multiplier changes via AE rising and AD curve shifting right, but
AD SHOCK LEADS TO change in P where P increases, WHICH reduces multiplier
as AE reduces back down
The Importance of the Shape of the AS Curve
Flat range
any AD shock leads to a change in equilibrium GDP but no change in P; k = simple multiplier
Intermediate range
a shift in AD curve gives rise to both real GDP and P; multiplier is positive but smaller than SP B/C of changes in P
Steep range
any change in aggregate demand leads to sharp change in P and little or no change in real GDP; multiplier nearing 0; economy near Y*
Aggregate Supply Shocks
AS shocks cause P and real GDP to change in opposite directions; an AS shock moves equilibrium GDP along the AD curve, causing P & real GDP to move in opposite directions
INCREASE in SUPPLY = P FALLING and GDP RISING
(POSITIVE AS SHOCK);
a DECREASE in SUPPLY = P RISING and GDP FALLING
(NEGATIVE AS SHOCK)
Negative AS Shock = upward (left) shift in AS curve;
E.G increase in oil, copper, etc.
Positive AS shock = downward (right) shift in AS curve; BOTH AT ANY GIVEN P
Real GDP falling while P level rises = stagflation
A Word of Warning
sometimes event can lead to both AD and AS shocks
*world price of oil falling LEADS to positive supply shock
b/c oil is an important input to production of many firms
BUT leads to negative demand shock for nations**
exporting oil** like Canada