Macroeconomic Equilibrium Lecture Notes

Introduction to Macroeconomic Equilibrium

Macroeconomic equilibrium occurs where Aggregate Demand (AD) equals Aggregate Supply (AS).
Illustration of macro equilibrium can vary between different models: particularly the Classical Model and the Keynesian Model.

Short Run Macroeconomic Equilibrium
- Occurs where AD = Short-Run Aggregate Supply (SRAS), but not equal to Long-Run Aggregate Supply (LRAS).
- Diagrams show short-term equilibria where production is not at full employment output (Yfe).
- Deviations indicate a short run state:
  - Deflationary Gap / Recessionary Gap / Negative Output Gap: Economy producing below Yfe.
  - Inflationary Gap / Positive Output Gap: Economy producing above Yfe using unsustainable factors (e.g., overworking labor, overutilizing machinery).
Long Run Macroeconomic Equilibrium
- Occurs where AD = SRAS = LRAS.
- The economy is at full employment output (Yfe) with no output gaps.

Keynesian LRAS curves can intersect with AD at any point, indicating potential long-run equilibrium.
Keynesian Interpretation:
- AD intersects LRAS at any level (vertical, horizontal, or upward sloping segments).
- Long-run equilibrium can exist even if not at Yfe.
More flexible than the classical model in terms of where long-run equilibria can persist.

Yfe: Maximum sustainable output using all factors of production.
Output Gaps: Differences between actual and potential production levels.
- Short-run discrepancies between AD and LRAS indicate temporary adjustments.

Differing interpretations between Classical and Keynesian models are crucial for understanding macroeconomic equilibrium.
Classical model emphasizes return to Yfe in the long run, whereas Keynesian model allows for sustained equilibrium below Yfe.

Next video will explore shifts in these curves and their implications on macroeconomic equilibrium.