Macroeconomic Equilibrium

Question 1

What happens when the AS is very elastic?

Answer 1

• There is a lot of spare capacity int he economy

* After initial injection shifts the AD curve, the multiplier can take effect to give a larger rise in output

Question 2

What happens when the AS is very inelastic?

Answer 2

• There is much less spare capacity in the economy
• The same initial shift in AD cannot be multiplier in the same way, there is a smaller rise in output ( but a larger rise in prices )

Question 3

How does an increase in AS affect the economy?

Answer 3

• Increase in capacity of the economy
• Increase in output
• Increased economic growth, more jobs, less unemployment.
• Price level will fall and economy becomes more competitive internationally

Question 4

What happens if LRAS increases?

Answer 4

• Long run output is increased
• Price level falls
• Economy remains at fully full employment

Question 5

What is equilibrium ( inefficient ) for short run?

Answer 5

In the short run, equilibrium might be less than the level needed to reach the level of
GDP at full employment. This occurs when there is inefficient AD in the economy,
and a negative output gap is created. This means there is unemployment in the
economy

Question 6

What is equilibrium ( excess AD )?

Answer 6

In the short run, the equilibrium position might be above the level needed to reach
the level of GDP at full employment. This occurs when there is excess AD in the
economy, and a positive output gap is created.