Macroeconomic Equilibrium

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.