Real National Output Equilibrium
Short-run Equilibrium
- Real national output equilibrium occurs where aggregate demand intersects with aggregate supply
A diagram showing the Classical short-run equilibrium in an economy resulting in an equilibrium price of AP1 and real output of Y1
- According to classical theory, this economy is in short run equilibrium at AP1Y1
- Any changes to the components of AD will cause the AD curve to shift left or right creating a new short-run equilibrium
- Any changes to the determinants of SRAS will shift the SRAS curve left or right creating a new short-run equilibrium
Long-run Equilibrium
- Classical and Keynesian economists have different views on the long-run equilibrium of real national output
- Classical economists believe that the economy will always return to its full potential level of output and all that will change in the long-run, is the average price level
- Keynesian economists believe that the economy can be in long-run equilibrium at any level of output
A diagram that shows the Classical view of long-run equilibrium which occurs at the intersection of long-run aggregate supply (LRAS), short-run aggregate supply (SRAS) & aggregate demand (AD)
Diagram Analysis
- The LRAS curve demonstrates the maximum possible output of an economy using all of its scarce resources
- The SRAS intersects with AD at the LRAS curve
- This economy is producing at the full employment level of output (YFE)
- The average price level at YFE is AP1
A diagram that shows the Keynesian view of long-run equilibrium which occurs at the intersection of long-run aggregate supply (LRAS) & aggregate demand (AD)
Diagram Analysis
- The vertical portion of the LRAS curve corresponds to the classical view of LRAS
- The Keynesian view believes there is a maximum level of possible output
- The LRAS curve becomes elastic at a certain price level as prices cannot fall further
- Possibly due to minimum wage laws, the existence of trade unions, or long-term employment contracts preventing wage decreases
- Real output national equilibrium can occur at any level of output
- In this case equilibrium is at the intersection of LRAS and AD (AP1Y1)