Macroeconomic Equilibrium

Deflationary Gap

A deflationary gap is where the economy is in equilibrium at a level that is less than the full employment level of output.

Recessionary Gap

A deflationary gap is where the economy is in equilibrium at a level that is less than the full employment level of output.

Components of Aggregate Demand

Aggregate demand is the total spending on goods and services in a period of time at a given price level -Consumption -Investment -Government spending -Net exports

Components of Government Spending

All kinds of spendings of the government -Commitment to support a given industry -Obliged to spend to correct market failure -Health policy might require increased government spending on schools or education

Inflationary Gap

An inflationary gap is where the economy is in equilibrium at the level of output that is greater than the full employment level of output or beyond the long-run aggregate supply curve.

Fiscal Policy

Fiscal Policy is defined as the set of a government's policies relating to its spending and taxation rates

Short-run Equilibrium

The economy is in short run equilibrium when aggregate demand equals short run aggregate supply (SRAS).

Components of Consumption

Consumption is the total spending by consumers on domestic goods and services -Changes in income -Changes in interest rates -Changes in wealth -Changes in expectations/consumer confidence -Household Indebtedness

Components of Investment

Investment is the addition of capital stock to the economy -Interest Rates -Changes in the level of national income -Technological changes -Expectations/business confidence

Macroeconomic Equilibrium

Macroeconomic equilibrium is an economic state in an economy where the quantity of aggregate demand equals the quantity of aggregate supply

Business Confidence Index

Measure of business confidence level (if high will increase investments)

Consumer Confidence Index

Measure of consumers confidence level (if high will increase consumption)

Monetary Policy

Monetary policy is defined as the set of official policies governing the supply of money in the economy and the level of interest rates in an economy

Components of Net Exports

Net exports are the difference between a country's total value of exports and total value of imports Exports/Imports -Changes in foreign/national income -Changes in value of countries currency -Changes in a country's trade policy -Relative rates of inflation

Short-run Aggregate Supply

The SRAS curve shows the relationship between the average price level and the level of national output under the ceteris paribus assumption - we assume that the factor of production costs remain constant

Long-run Equilibrium

The long-run equilibrium is where AD is equal to long-run aggregate supply (LRAS).