- Explain, using a diagram, the determination of short-run equilibrium, using the SRAS curve.
- Examine, using diagrams, the impacts of changes in short-run equilibrium.
Task: Short run equilibrium occurs where AD=SRAS, this may or may not coincide with the full employment level of equilibrium. If AD or SRAS change then so will the price level and the level of real income/output/GDP. You will be given a handout to show short run equilibrium and some tasks in which you will analyse the impact of various scenarios on the economy using AD/SRAS analysis.
Equilibrium in the monetarist/new classical model
- Explain, using a diagram, the determination of long-run equilibrium, indicating that long-run equilibrium occurs at the full employment level of output.
- Explain why, in the monetarist/new classical approach, while there may be short-term fluctuations in output, the economy will always return to the full employment level of output in the long run.
- Examine, using diagrams, the impacts of changes in the long-run equilibrium.
- Explain, using the Keynesian AD/AS diagram, that the economy may be in equilibrium at any level of real output where AD intersects AS.
- Explain, using a diagram, that if the economy is in equilibrium at a level of real output below the full employment level of output, then there is a deflationary (recessionary) gap.
- Discuss why, in contrast to the monetarist/new classical model, the economy can remain stuck in a deflationary (recessionary) gap in the Keynesian model.
- Explain, using a diagram, that if AD increases in the vertical section of the AS curve, then there is an inflationary gap.
- Discuss why, in contrast to the monetarist/new classical model, increases in aggregate demand in the Keynesian AD/AS model need not be inflationary, unless the economy is operating close to, or at, the level of full employment.
Task: You will receive another packet to address these objectives and will be practicing drawing graphs and using them to explain long-run equilibrium positions.