2.4.3 equilibrium levels of real national output

What is the equilibrium real national output?

Does the economy need to change its output level at this equilibrium?

The level of GDP where AD = AS

At this equilibrium - there is no tendency for the economy to alter its output level:

• All produced g+s are sold

• Neither excess supply nor excess demand

Name the 3 key characteristics that occur at this equilibrium

• Price stability: prices are stable - no inflationary/deflationary pressure

• Full employment: economy operates at full employment - all available resources are utilised effectively

• Sustainable output: output level is sustainable in the long run without causing imbalances

Apply the concept to the real-world

e.g. what would happen if there were any changes from this point?

In a hypothetical economy, if AD = AS at a GDP level of $2 trillion, this is the equilibrium output. Any deviation from this point would prompt adjustments in prices or output to restore equilibrium.

What causes an increase in Aggregate Demand (AD), and what are the effects on the economy?

Causes: higher consumer confidence, increased gov spending, tax cuts

Effects: outward shift of AD curve, higher price level (inflation) - things get more expensive, increase in real national output (economy produces more g+s)

What causes a decrease in Aggregate Demand (AD), and what are the effects on the economy?

Causes: reduced consumer spending, lower gov expenditure/spending, higher taxes

Effects: inward shift of AD curve, lower price level (deflation), decrease in real national output

What causes an increase in Aggregate Supply (AS), and what are the effects on the economy?

Causes: tech advancements (new inventions/new ways to make production more efficient), reduction in production costs (e.g. price of materials decrease), improvements in labour productivity (workers = more skilled/efficient - so can produce more)

Effects: outward shift of AS curve, lower price level, increase in real national output

What causes a decrease in Aggregate Supply (AS), and what are the effects on the economy?

Causes: natural disasters, increased production costs, labour strikes

Effects: inward shift of AS curve, higher price level, decrease in real national output

Apply concepts to the real-world

e.g. examples for increase in AD + decrease in AS

Increase in AD: during COVID-19 - various govs increased spending + provided stimulus checks, shifting AD to the right

Decrease in AS: the 1970s oil crisis saw a sharp increase in oil prices, shifting the AS curve inwards + causing stagflation (higher prices + lower output)