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Macroeconomic Equilibrium

Macroeconomic Equilibrium. Chapter 8. Potential GDP. Potential GDP: the level of real GDP associated with full employment sustainable upper limit of production = production possibilities frontier Actual real GDP can be equal to potential GDP (at full employment)

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Macroeconomic Equilibrium

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  1. Macroeconomic Equilibrium Chapter 8

  2. Potential GDP • Potential GDP: the level of real GDP associated with full employment • sustainable upper limit of production = production possibilities frontier • Actual real GDP can be • equal to potential GDP (at full employment) • greater than potential GDP (only temporarily) • or less than potential GDP ( in recession)

  3. Labor Market • Demand for labor • Relationship between the quantity of labor demanded and real wage rate • Shift of labor demand curve due to increase in productivity and increase in product demand • Supply of labor • Relationship between the quantity of labor supplied and real wage rate • Shift of labor supply due to increase in working age population and preference changes • Labor market equilibrium

  4. Job Search and Job Rationing • Job search and its duration depends on • Demographic changes occurring in population and households • Unemployment benefits • Structural changes • Job rationing • When real wage rate is higher than the equilibrium level. Why? Because of • Efficient wage • Minimum wage law • Union wage • Job rationing results in increase in natural unemployment.

  5. Aggregate Demand • AD (Aggregate demand): relationship between the quantity of real GDP demanded and the price level • Inverse relationship (downward sloping curve) • Shift of AD curve • Change in taxes or government purchases • Change in money supply and interest rate • Change in foreign income

  6. Aggregate Supply • AS (Aggregate supply): relationship between the quantity of real GDP supplied and the price level • Direct relationship (upward-sloping curve) • Shift of AS curve • Change in factors of production  change in potential GDP  change in AS • Change in cost of production factors (e.g. money wage rate, oil price)

  7. Macroeconomic Equilibrium • Aggregate demand and aggregate supply determine real GDP and the price level. • Three types of macroeconomic equilibrium • Full-employment equilibrium • Above full-employment equilibrium • Below full-employment equilibrium • Inflation and recession • Inflation occurs when AD increases more rapidly than AS. • Recession can occur when either AD or AS decrease.

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