AS Macro Revision Macroeconomic Equilibrium
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This document discusses macroeconomic equilibrium using aggregate demand (AD) and aggregate supply (AS) analysis. It provides diagrams showing: 1) How macroeconomic equilibrium is established at the point where AD intersects short-run aggregate supply (SRAS). 2) How an increase in AD leads to expansion of output and a higher equilibrium price level, while an increase in AS expands both AD and output. 3) It also shows how a decrease in either AD or AS results in a contraction of output and a lower equilibrium price level.
AS Macro Revision Macroeconomic Equilibrium
- 1. AS Macro Revision Macroeconomic Equilibrium Spring 2014
- 2. We add new resources / links / articles every day to our Economics blogs Follow this link for the AS Macro Blog on Tutor2u www.tutor2u.net/blog/index.php/economics/categories/C59
- 3. Macroeconomic Equilibrium using AD-AS General Price Level Macro-economic equilibrium is established when AD intersects with SRAS AS What matters is whether total demand for goods and services (AD) is close to actual production from domestic and external sources GPL1 AD Y1 Real GDP
- 4. Impact of an increase in Aggregate Demand General Price Level An increase in AD causes an expansion of aggregate supply and a higher equilibrium level of national output (i.e. higher real GDP) AS GPL2 GPL1 AD2 AD1 Y1 Y2 Real GDP
- 5. Impact of an increase in Aggregate Supply General Price Level An increase in AS causes an expansion of AD and a higher equilibrium level of national output (i.e. higher real GDP) AS1 AS2 GPL1 GPL2 AD Y1 Y2 Real GDP
- 6. Impact of a fall in Aggregate Demand General Price Level A decrease in AD causes a contraction of AS and a lower equilibrium level of national output (i.e. lower real GDP) AS GPL1 GPL2 AD1 AD2 Y2 Y1 Real GDP
- 7. Impact of a fall in Aggregate Supply General Price Level A decrease in AS causes a contraction of AS and a lower equilibrium level of national output (i.e. lower real GDP) AS2 AS1 GPL2 GPL1 AD Y2 Y1 The effect of a decrease in AS will partly depend on the cause. A decrease in investment will be particularly harmful as it will also decrease aggregate demand Real GDP
- 8. Economic Effects of a Fall in Aggregate Supply (AS) Aggregate supply can fall both in the short run and in the long run – possible causes are outlined on the left and some of the macroeconomic consequences are covered on the right Some Causes of Fall in Aggregate Supply Brain drain – an outward migration of workers Collapse in business capital investment Possible Macro Consequences May cause higher inflation May reduce real GDP/national output Higher production costs May reduce employment Effects of a major natural disaster / shock May increase a BoP current account deficit
- 9. Get help on the AS macroeconomics course using twitter #econ2 @tutor2u_econ www.tutor2u.net