Economics Assignment Stable Economic Equilibrium

Question: Discuss about the Economics Assignment for Stable Economic Equilibrium. Answer: Introduction: To achieve a stable economic equilibrium, it is imperative that the economy operates at an output level at which the SRAS curve, aggregate demand curve, and the LRAS curve intersect. Particularly, this is because the point of intersection between the three curves is the optimal point of full employment equilibrium. As such, this point denotes the long run equilibrium in the economy (Michaillat Saez, 2013). Therefore, at this point, the aggregate demand grows, and the potential output increases proportionally. In turn, this suggests that there are no pressures in the economy to raise prices or reduce production of goods and services. Besides, the employment rate and growth levels are at the target level. What is more, inflation at this point is minimal. Consequently, this means that the market is at a stable equilibrium at when the LRAS, SRAS, and aggregate demand curves all intersect. In macroeconomics, the aggregate demand curve is a graphical representation of the correlation between the prices of goods and services in the market, and the quantity of actual GDP at a given point in time (Khan, n.d.). On the other hand, the aggregate supply curve graphically portrays the connection between the amount of a good or service supplied and the level price level over a given period of time. It is imperative to note that in the short-run equilibrium, the real GDP attained may either be below or above the potential GDP (Macroeconomic Phenomena n.d.). In contrast, the long-term macroeconomic equilibrium comes about when the GDP attained at a particular point in time is equal to the potential GDP. Particularly, employment levels in the long run period move towards its natural employment and the real GDP to potential Short-Run Macroeconomic Equilibrium According to the new-classical point of view, the output is often either above the equilibrium or below potential output level. When the output level is above the long term equilibrium, the potential GDP is below the real GDP achieved (Mayer, 2015). Consequently, this brings about inflationary pressure in the economy. Mainly, this is caused by the gap between the current output and the potential output of the economy. In this case, therefore, the economy is unstable (Aggregate Demand n.d.). In the same way, when the current output level is below the long-run level, a downward pressure will be exerted in the price level. As such, the price level will be pushed downwards, thereby creating a deflationary pressure (Mayer, 2015). In turn, this leads to a recessionary gap in the economy. The recessionary gap may imply that the economys long-run potential outstrips the short term increase in real GDP (Aggregate Demand n.d.). Therefore, the economy remains unstable until the aggregate demand curve, LRAS and SRAS curve intersect over the long term. Long-run Macroeconomic Equilibrium According to the new classical school of thought, the LRAS curve represents the level of optimal output that can be achieved in a particular economy over the long term (Mayer, 2015). Commonly, this output level is referred to as the general equilibrium. At this output level, all the goods markets and factor markets have cleared, and the economy is operating at full employment. Additionally, all the available workers who are able and willing are employed the prevailing market wage rate. Besides, full employment is often described as the level at which the labor market has cleared (Khan, n.d.).. Thus, at the intersection, the supply of labor equals its demand. Given that the job market is tightly interconnected with the output level, the demand for labor will be derived from planned expenditure and projected output. It is worth noting that the region to the left of the LRAS represents an economy that operates below its potential output. Thus, there exists a recessionary gap. At this point, there is room for additional employment (Pettinger, 2011). For this reason, strong economic forces will initiate to try to bring the economy to full employment. Thus, over time, the factor prices will adjust, and real wages will fall. Likewise, both the goods and the factor markets will adjust and eventually clear, bringing the economy to the point of general equilibrium. The neo-classical argue that if the market is perfectly competitive, any disequilibrium in the market will be short term only (Pettinger, 2011). In the same way, when the economy is operating above its potential output, a situation of overfull employment will occur. At this output level, real wages will continue to rise, forcing the markets to adjust. As such, there exists an inflationary gap in the economy. Over time, the factor markets, and goods markets also change and eventually clear. In turn, this restores the level of unemployment to the long run equilibrium point, where the LRAS, aggregate demand, and SRAS curves all intersect. Essentially, the long-term, in this model refers to the level around which economic activity will take place over a long period of time (Moore, 2016). Strong economic forces such as inflationary and deflationary pressures in the occur indicate that the market conditions are unstable and thus not operating at the optimal employment level (Moore, 2016). For this reason, the government often takes an active role and participate in stabilizing the level of output in the economy. To offset the deflationary gap, the government initiates expansionary fiscal policies and monetary policies to stimulate the economy towards full employment level (Aggregate Demand n.d.). In the same way, the government uses contractionary monetary and fiscal policies to reduce the prevailing inflationary pressure in the economy (Logan, 2016). Such policies slow down the economy, thereby reducing output level to the optimal levels. Consequently, for a stable economic equilibrium to exist at any particular point in time, the economy must operate at an output level at which the aggregate curve meets with the LRAS and SRAR curves simultaneously. References Aggregate Demand and Aggregate Supply. Lardbucket.org. Retrieved 9 January 2017, from https://2012books.lardbucket.org/books/macroeconomics-principles-v1.1/s10-aggregate-demand-and-aggregate.html Khan, S. Aggregate demand and aggregate supply. Khan Academy. Retrieved 9 January 2017, from https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic Logan, C. (2016). Macroeconomics Unit 3 part 5. Docslide. Retrieved 9 January 2017, from https://docslide.us/documents/macroeconomics-unit-3-part-5-pl-qrealgdpy-ad-lras-pl-1-yfyf-sras-y1y1.html Macroeconomic Phenomena in the AD/AS Model. Whitenova.com. Retrieved 9 January 2017, from https://www.whitenova.com/thinkEconomics/simul.html Mayer, D. (2016). AP Macroeconomics by David Mayer. Slideplayer.com. Retrieved 9 January 2017, from https://slideplayer.com/slide/2438942/ Michaillat, P. Saez, E. (2013). A Model of Aggregate Demand and Unemployment (1st ed., pp. 5-21). Massachusetts: Cambridge. Retrieved from https://eml.berkeley.edu/~saez/michaillat-saezNBER13july.pdf Moore, L. (2016). Chapter 9- Aggregate Supply, Aggregate Demand Is the market economy of U.S. stable? How do we know? What can keep the economy stable? Government or Private. Slideplayer.com. Retrieved 9 January 2017, from https://slideplayer.com/slide/9551598/ Pettinger, T. (2011). Difference between SRAS and LRAS. Economics Help. Retrieved 9 January 2017, from https://www.economicshelp.org/blog/2860/uncategorized/difference-between-sras-and-lras/