2. Equilibrium AD and AS

Draw an aggregate demand and supply curve showing equilibrium.

Define Equilibrium.

When the quantity of real GDP demanded equals the quantity of real GDP supplied. (total demand = total supply)

What is the impact of SRAS and AD equilibrium being lower than max capacity?

- Higher unemployment

- Decreased output

- Increased government spending

- Lower taxes

- Lower inflation

Define output gap.

The difference between actual growth and potential growth.

What is a negative output gap?

When the level of actual GDP is less than potential GDP and resources are under-utilized.

Draw a negative output gap

What is the problem with a negative output gap?

There is likely to be higher unemployment and possible deflation risks.

What is a positive output gap?

When the level of actual GDP is greater than potential GDP, resources are working beyond capacity e.g overtime.

What is the problem with a positive output gap?

Rising demand pull inflation and cost-push inflationary pressures.

Draw a positive output gap.