Macroeconomic Equilibrium

10 Key excerpts on "Macroeconomic Equilibrium"

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  eBook - PDF

  Macroeconomics for Business

  The Manager's Way of Understanding the Global Economy

  • Lawrence S. Davidson, Andreas Hauskrecht, Jürgen von Hagen(Authors)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  The equilibrium makes the decisions and plans of thousands of different households and businesses compatible with one another. In Figure 3.3, the Macroeconomic Equilibrium is shown to be the intersection of the AD curve with the AS curve and marked by a black dot. Note that we now have real GDP on the horizontal axis, because at the intersection of the two curves aggregate supply, aggregate demand, and aggregate income all coincide in one level of real GDP. Is there any hope that such an equilibrium exists in the real world? Or, to ask the same question in a slightly different way: Starting from a macroeconomic equilib- rium and assuming that some causal factor shifts the AD or AS curve, is there any hope that the economy would find a new Macroeconomic Equilibrium? The honest answer to this question relies partly on science, while partly it depends on your worldview. Science can identify the conditions under which a Macroeconomic Equilibrium can prevail, but it can neither prove nor disprove that the US economy is in a Macroeconomic Equilibrium at a given point in time. Worldviews involve beliefs about whether a market system will find and settle on an equilibrium. Such beliefs are part of our political convictions and are the object of public debates and political elections. Conservative analysts, commentators and policymakers typically assume that the market system is robust in the sense that, after some shock or P Real GDP Macroeconomic Equilibrium P 0 AD AS RGDP 0 Figure 3.3 Macroeconomic Equilibrium Macroeconomic Equilibrium 101 disturbance, it will return to a Macroeconomic Equilibrium all by itself. Liberal and left-leaning analysts, commentators and policymakers typically think that the market system is not robust in that sense and needs the assistance of government policies to return to an equilibrium.

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  Understanding Macroeconomic Theory

  • Bradley T. Ewing, John M. Barron, Gerald J. Lynch(Authors)
  • 2006(Publication Date)
  • Routledge

    (Publisher)

  It is important to realize that the phrase “equilibrium in the output market” in this context abstracts from supply-side considerations. At each price level, the aggregate demand curve indicates the output that, if produced, would equal output demand (along with satisfying the equilibrium conditions with respect to the financial and money markets). Production of output equal to that demanded would occur if firms sought simply to produce to meet market demand and if workers were readily available for employment so that firms could hire to achieve production equal to what was demanded. The term “equilibrium in the output market” does not imply equality between output demand and the output that our analysis of the labor market suggests would be supplied.

  Figure 6.5   Macroeconomic Equilibrium.

  Figure 6.5 combines the aggregate demand and aggregate supply curves. Where they intersect we know by construction that the resulting price level (pt )0 and output (yt )0 are such that

  •   the labor market is in equilibrium (the economy is at a point on the aggregate supply curve) and •   the output, financial, and money markets are in equilibrium (the economy is at a point on the aggregate demand curve).

  Conclusion

  Using a very simple framework, this chapter has developed a powerful macroeconomic model of the economy. This model is grounded in the general equilibrium theory set forth in earlier chapters. Moreover, this model highlights that degree of connectedness that exists among the output, labor, financial, and money markets. The microfoundations of macroeconomics have been emphasized, and it has been shown how market forces work in such a way as to lead to aggregate supply and demand, two key elements in any macroeconomic model.

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  Chinese Economists on Economic Reform - Collected Works of Lou Jiwei

  • Lou Jiwei, China Development Research Foundation(Authors)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  Equilibrium in aggregate supply and demand, and equilibrium in ‘the use of national income’ and the ‘production of national income,’ are two pairs of economic concepts that are used to analyze short-term economic phenomena. Using them as analytical tools can help us touch upon certain structural issues in our national economy and its prospects for long-term steady growth. They cannot be used to explain these issues in a fully comprehensive way. Nonetheless, equilibrium in our aggregate economy is the basis for any structural evolution and long-term steady growth. One could even say that correcting short-term imbalances in the overall economy is a prerequisite for steady economic growth. Therefore, it is absolutely necessary to have a deep understanding of the full meaning of these two pairs of concepts, as well as how they differ in terms of the policy considerations each one implies.

  Articles on economic topics in our country often equate the ‘aggregate demand and aggregate supply equilibrium’ with ‘equilibrium in use of our national income and the production of our national income.’ They refer to an ‘excess of aggregate demand over aggregate supply’ as though it were the same as the ‘excess distribution of the national income.’ In fact, these two pairs of concepts are linked but also have certain distinctions. The implications of their corresponding parts are not equivalent. Let’s look at a comparative analysis.

  1. The aggregate supply and the amount of ‘national income production’

  Simply put, ‘aggregate supply’ refers to those products and services that have an ‘actual practical-use value’ that can be produced by existing production capacities within one year. It can be roughly expressed in terms of the expected gross national product (GNP) as measured in constant prices, or by the expected national income. The thing that aggregate supply focuses on is the production capacity of such productive factors as assets, labor, land, imported materials, and foreign capital inflows. Within any given year, these are limited. Each is constrained by the quantity and quality of all other factors. For example, a quantitative maximum is imposed on imported materials and the amount of our foreign debt by the smallest extent of foreign exchange reserves and the highest amount of debt-servicing. ‘Aggregate supply’ refers to the maximum amount of ‘well-being’ that can be produced by the full capacity of production factors, after they are combined in optimal fashion. It is also referred to as the ‘production-possibility frontier’ or the ‘potential production level.’ We should say that referring to the maximum well-being of people is more accurate, since it excludes from the figures production of overstocked things that people don’t need, either for immediate or long-term consumption (as investment).

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  Macroeconomic Foundations of Macroeconomics

  • Alvaro Cencini(Author)
  • 2012(Publication Date)
  • Taylor & Francis

    (Publisher)

  In the words of Weintraub, ‘[e]quilibrium is a set of plans such that (1) for each agent, its plan seems best to it, (2) all plans are consistent among agents, and (3) actions based on those plans induce a well-defined outcome’ (Weintraub 1979: 9). In a Walrasian theoretical setting, equilibrium on the commodity market obtains when the set of (relative) prices and quantities is such that economic agents’ interaction leads to the maximization of their utilities and to the clearing of the market. The forces at work are those of supply and demand. If the economy is in a state of equilibrium, supply and demand balance, then their equality is assimilated to a condition of equilibrium. It is through the interaction of supply and demand, via their reciprocal adjustment, that equilibrium may be reached. This process of adjustment may take different paths and vary considerably according to the assumptions introduced in the model. However, independently of the specific model adopted, supply and demand are supposed to be functions of one or more variables classified as endogenous or exogenous according to the chosen theoretical frame of reference. The determination of the equilibrium set of prices is therefore that of the prices which, given the functional relationship represented mathematically by the equations of supply and demand, guarantee the perfect balancing of supply and demand as well as the best possible outcome for the economic agents involved in this market process.

  The example we have just considered relates to the determination of relative prices, but it may easily be extended to other areas of micro or macroeconomics. The general features of equilibrium analysis remain in fact unaltered whether we refer them to individual or to aggregate variables, to individual or to aggregate behaviour, to a neoclassical or to a Keynesian framework. Let us verify this claim by looking at the way Keynesian economists deal with the problem of national income. What has to be determined is a variable whose value is to be discovered by solving a system of independent equations. National income is thus said to be functionally related to a number of endogenous and exogenous variables, whose specification depends on the model chosen as reference. For example, in the simplest Keynesian model usually proposed in textbooks, national income is related to consumption (the endogenous variable) and investment (the exogenous variable). The system is made up of two unknowns, income and consumption, and two independent equations. The unknowns are determined through the simultaneous solution of the two equations, Y = C + Ī and C = a + cY (where Y stands for national income, Ī for investment, C for consumption, a for vital consumption and c for the marginal propensity to consume; and where Ī, a and c

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  Macroeconomics

  Principles & Policy

  • William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  186 Part 2 The Macroeconomy: Aggregate Supply and Demand An autonomous increase in spending leads to a horizontal shift of the aggregate demand curve by an amount given by the oversimplified multiplier formula. So everything we have just learned about the multiplier applies to shifts of the economy’s aggregate demand curve. If businesses decide to increase their investment spending, if the consumption function shifts upward, or if the government or foreigners decide to buy more goods, then the aggregate demand curve moves horizontally to the right—as indicated in Figure 12. If any of these variables moves downward instead, the aggregate demand curve moves horizontally to the left. Thus, the economy’s aggregate demand curve cannot be expected to stand still for long. Autonomous changes in one or another of the four components of total spending will cause it to move around. But to understand the consequences of such shifts of aggregate demand, we must bring the aggregate supply curve back into the picture. That is the task for the next chapter. Summary 1. The equilibrium level of GDP on the demand side is the level at which total spending just equals pro- duction. Because total spending is the sum of con- sumption, investment, government purchases, and net exports, the condition for equilibrium is .

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  Macroeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Finally, learning about the macro economy is like learning about the weather. You may not be able to change the weather, but knowing what’s coming will help you cope with it better—for example, by bringing an umbrella if rain is on the way. Likewise, you may not be able to change macroeconomic conditions, but knowing what’s coming will help you adapt to them better—for example, by deciding to pursue graduate studies rather than dive into a poor job market. A knowledge of macroeconomics will give you an edge in coping with a complex economic environment. Summary 1. Macroeconomics focuses on the national economy. A standard measure of performance is the growth of real gross domestic product, or real GDP, the value of all final goods and services produced in the nation during the year. 2. The economy has two phases: periods of expansion and periods of contraction. No two business cycles are the same. Before 1945, expansions averaged 29 months and contractions 21 months. Since 1945, expansions have averaged 57 months and contrac- tions 11 months. Despite the Great Depression and later reces- sions, the economy’s output has grown fifteenfold since 1929 and employment has grown faster than the population. 3. The aggregate demand curve slopes downward, reflecting a negative, or inverse, relationship between the price level and real GDP demanded. The aggregate supply curve slopes upward, reflecting a positive, or direct, relationship between the price level and real GDP supplied. The intersection of the two curves determines the economy’s real GDP and price level. 4. The Great Depression and earlier depressions prompted John Maynard Keynes to argue that the economy can be unstable, largely because business investment is erratic. Keynes did not believe that contractions were self-correcting. He argued that whenever aggregate demand sagged, the federal government should spend more or tax less to stimulate aggregate demand.

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  Macroeconomics

  Principles and Policy

  • William Baumol, Alan Blinder(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  The economy’s self-correcting mechanism refers to the way money wages react to either a recessionary gap or an infla-tionary gap. Wage changes shift the aggregate supply curve and therefore change equilibrium GDP and the equilibrium price level. Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 204 Part 2 The Macroeconomy: Aggregate Supply and Demand When equilibrium GDP exceeds potential GDP, j obs are plenti f ul an d l a b or is in g reat d eman d . Firms are l i k e ly to h ave trou bl e recruit-in g new workers or even holdin g onto their old ones as other f irms tr y to l ure wor k ers awa y wit h h i gh er wa g es. Risin g nominal wa g es add to business costs, which shift the a gg re-g ate suppl y curve to the left. As the a gg re g ate suppl y curve moves f r o m S S 0 0 S to S S 1 1 S in Fi g ure 7, the in f lationar y g ap shrinks. In other w ords, in f lation eventuall y erodes the in f lationar y g ap and brin g s the econom y to an equi l i b rium at potentia l GDP ( point F ). There is a strai g ht f orward wa y o f lookin g at the economics behind this process. In f lation arises because bu y ers are demandin g more output t h an t h e econom y can pro d uce at norma l operatin g rates. To paraphrase an old cliché, there is too much demand chasin g too little s uppl y . Such an environment encoura g es price hikes . Ultimatel y , risin g prices eat awa y at the purchasin g power o f con-s umers’ wealth, forcin g them to cut back on consumption, as explained in Cha p ter 8. In addition, ex p orts fall and im p orts rise, as we learned in Chapter 9.

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  Macroeconomics in Emerging Markets

  • Peter J. Montiel(Author)
  • 2011(Publication Date)
  • Cambridge University Press

    (Publisher)

  Sheehy, Edmund J. (1986), “Unanticipated Inflation, Devaluation, and Output in Latin America,” World Development , vol. X14, pp. 665–671. 5 Aggregate Demand and Goods-Market Equilibrium Now that we have seen what determines the supply of goods produced in the domestic economy, we can turn to the other side of the market: the total demand for those goods. In this chapter, we will derive the aggregate demand for domestic goods under the simplifying assumption that the domestic interest rate is determined as an exogenous policy variable by the central bank. We will then put our description of aggregate demand together with that of aggregate supply from the preceding chapter to complete our first model of short-run Macroeconomic Equilibrium. We will use this model to explore how the domestic economy responds to a variety of shocks, both to the supply and the demand side of the economy, and we will trace the effects of such shocks not just on the market for domestic goods but also on the labor market and the economy’s balance of payments accounts. We begin by examining in Section I the factors that influence the aggregate demand for domestic goods by domestic as well as foreign residents. In Section II, we will put aggregate supply and demand together to show how the equilibrium values of the domestic price level and level of output are determined, as well as those of a variety of other macroeconomic variables that are of interest to policy makers in emerging and developing countries. Section III examines how all these endogenous variables respond to a wide range of both nonpolicy and policy shocks. Section IV shows how the analysis in the two preceding sections can be summarized graphically in the form of the goods-market equilibrium (GM) curve. This analysis serves as a building block for the more complete models that we will construct in the chapters that follow.

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  Macroeconomics

  • William Boyes, Michael Melvin(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  § 8-5a • In the short run, a shift in aggregate demand estab-lishes a new, but temporary, equilibrium along the short-run aggregate supply curve. § 8-5a • In the long run, the short-run aggregate supply curve shifts so that changes in aggregate demand determine the price level but not the equilibrium level of output or real GDP. § 8-5b R E C A P 1. The equilibrium price level and real GDP are at the point where the aggregate demand and ag-gregate supply curves intersect. 2. In the short run, a shift in aggregate demand establishes a temporary equilibrium along the short-run aggregate supply curve. 3. In the long run, the short-run aggregate supply curve shifts so that changes in aggregate demand affect only the price level, not the equi-librium level of output or real GDP. Chapter 8 Macroeconomic Equilibrium: Aggregate Demand and Supply 167 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. K E Y T E R M S aggregate demand curve, 147 aggregate supply curve, 147 cost-push inflation, 149 demand-pull inflation, 147 interest rate effect, 153 international trade effect, 153 long-run aggregate supply curve (LRAS), 159 wealth effect, 152 E X E R C I S E S 1. How is the aggregate demand curve different from the demand curve for a single good, like hamburgers? 2. Why does the aggregate demand curve slope down-ward? Give real-world examples of the three effects that explain the slope of the curve. 3. How does an increase in foreign income affect domestic aggregate expenditures and demand? Draw a diagram to illustrate your answer.

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  Economics

  Principles & Policy

  • William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Depending on the locations of the aggregate demand and aggregate supply curves, then, we can reach equilibrium beyond potential GDP (an inflationary gap), exactly at poten- tial GDP, or below potential GDP (a recessionary gap). All three possibilities are illustrated in Figure 5. The three upper panels duplicate diagrams from the last chapter. 2 Start with the upper-middle panel, in which the expenditure schedule 1 1 1 2 1 C I G X IM ( ) crosses the 45° line exactly at potential GDP—which we take to be $7,000 billion in the example. Equilibrium is at point E, with neither a recessionary nor an inflationary gap. Now suppose that total expenditures either fall to 1 1 1 2 0 C I G X IM ( ) (producing the upper-left dia- gram) or rise to 1 1 1 2 2 C I G X IM ( ) (producing the upper-right diagram). As we read across the page from left to right, we see equilibrium occurring with a recessionary gap, exactly at full employment, or with an inflationary gap—depending on the position of the 1 1 1 2 C I G X IM ( ) line. In the previous chapter, we learned about several variables that might shift the expenditure schedule up and down in this way. One of them was the price level. The three lower panels portray the same three cases differently—in a way that can tell us what the price level will be. These diagrams consider both aggregate demand and aggre- gate supply, and, therefore, simultaneously determine both the equilibrium price level and the equilibrium GDP at point E—where the aggregate supply curve SS and the aggregate demand curve DD intersect. However, there are still three possibilities. In the lower-left panel, aggregate demand is too low to provide jobs for the entire labor force, so we have a recessionary gap equal to distance EB, or $1,000 billion. This situation The recessionary gap is the amount by which the equilibrium level of real GDP falls short of potential GDP.

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