Answer to Question #96873 in Macroeconomics for Tiffany

Question

Explain the process through which an economy returns to long-run equilibrium in the
AD/AS model when output is above full employment.

Explain the process through which an economy returns to long-run equilibrium in the AD/AS model when output is below full employment

Answer 1

AS/AD model,Long-run equilibrium and Short-run equilibrium

The long run concept is a theoretical concept in which all price and quantities have fully adjusted and are in market equilibrium. in the short term, variable factors are changing and the market is not fully equilibrium.

Basically lone run equilibrium is output will not increase when AD is increase.

Figure 1 above full employment equilibrium

SRAS-short run aggregate supply

LRAS-long run aggregate demand

AD=aggregate demand

An economy that runs above full employment equilibrium is a cause for concern as it may lead to inflation.

Over time, the economy and employment markets will shift back into equilibrium as higher prices bring demand back down to normal run-rate levels. $y2$ is nominal GDP and $y2$ in real GDP

in the long run market equilibrium is $e2$

.

Figure 2

Under-employment - equality between aggregate demand and aggregate total supply but less than full employment '.This is a state of equilibrium where the level of demand is less than the full employment level of production. In the production of output, not all resources of the economy are fully employed, that is, some resources are unemployed.

$y2-y1=$ recessionary gap

In this case, a broader fiscal policy will be needed to increase expenditure and reduce taxes, which will help shift aggregate demand to the right.

in the long run market equilibrium is $e2$