short run equilibrium

Short-run Equilibrium

  • Definition: Short-run equilibrium refers to a situation in the economy where aggregate demand (AD) equals short-run aggregate supply (SRAS), determining the level of real GDP and the price level.

Output Gaps

  • Recessionary Gap:

    • Occurs when actual aggregate output is below the potential output.

    • Also referred to as a negative output gap.

    • Indicates the economy is in a recession, characterized by low output and high unemployment (above Non-Accelerating Inflation Rate of Unemployment - NAIRU).

    • Price Levels: Likely low, often a result of a decrease in aggregate demand (AD).

    • Visual Representation:

      • Long-Run Aggregate Supply (LRAS): Potential output.

      • Actual SRAS: Below potential output indicating recession.

  • Inflationary Gap:

    • Occurs when actual aggregate output exceeds potential output.

    • Also referred to as a positive output gap.

    • Indicates a booming economy with high output and low unemployment (below NAIRU).

    • Price Levels: Likely high, often a result of an increase in aggregate demand (AD).

    • Visual Representation:

      • LRAS: Potential output.

      • Actual SRAS: Above potential output indicating economic boom.

Real GDP Analysis

  • Recessionary Gap:

    • Example: Real GDP at 527 trillion (Tr) with potential output at $30 trillion (Tr):

      • Output gap of -$3 trillion (Tr).

  • Inflationary Gap:

    • Example: Real GDP potentially at +$57 trillion (Tr) while operating beyond the sustainable capacity, termed as exceeding the AD maximum sustainable capacity.