Question

If the economy is operating at e no + Is the economy in short-run macroeconomic equilibrium? Explain Is the economy in long-run macroeconomic equilibrium? Explain What type of gap exists in this economy? What will happen to the size of the output gap in the long run? LRAS SRASI AD Above full employed equilibrium

Answer 1

1. If the economy is operating at e1, it is a short-run macroeconomic equilibrium because the equilibrium point is at the intersection of short-run aggregate supply and aggregate demand curve.

2. The economy is not a long-run equilibrium because, at this point, AD does not intersect with LRAS(long-run aggregate supply curve).

3. A positive output gap exists in the economy where the economy is operating above the potential level output. The actual level GDP is more than the estimated potential level of GDP.

4. In the long run, the output gap decreases to reach the potential level of GDP. Hence, thee equilibrium point will shift to e2.