Macroeconomic Equilibrium

Macroeconomic equilibrium is the level of real GDP consistent with a given price level, as determined by the intersection of the aggregate supply and demand curves. This equilibrium is shown in Figure 16.5 where Q is the level of real GDP that is consistent with the price level P. This is a static equilibrium because it represents a situation at a particular point in time.

If the economy is growing, the price level may or may not change, depending on changes in productivity and the money supply. This is one of the dilemmas facing economic policy makers—how to make real GDP grow without unduly increasing the price level and thereby the rate of inflation.

Aggregate supply and demand curves are useful concepts, providing a framework for analyzing equilibrium, economic growth, and price stability. They can be used to give an idea of the way and direction

1. Main Idea What factors might cause aggregate demand to increase?

2. Key Terms Define aggregate supply, aggregate supply curve, aggregate demand, aggregate demand curve, macroeconomic equilibrium.

3. Describe the concept of aggregate supply.

4. Explain the importance of aggregate demand.

5. Describe the nature of macroeconomic equilibrium.

Applying Economic Concepts

6. Equilibrium Define macroeconomic equilibrium, then discuss how a decrease in business investments would affect the macroeconomic equilibrium.

7. Analyzing Information What kind of effect would higher taxes have on aggregate supply? Explain your reasoning.

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that things will change, but they do not yield exact predictions. Even so, they are becoming increasingly important when analyzing macroeconomic issues.

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Figure 16.5

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GLANCE

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Responses

  • tyler
    How decrease in business investments would affect the macroeconomic equilibrium?
    8 days ago

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