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April 16, 2012 Macroeconomic Equilibrium Goal 1: Define and draw model of macroeconomic equilibrium. Macroeconomic Equilibrium-Is the point where the quantity of aggregate demand equals the quantity of aggregate supply. Qf = Full Employment Full Employment- means there is no unemployment due Macroeconomic Equilibrium Per 6 Page 1 Full Employment- means there is no unemployment due to a recession, is no cyclical unemployment -Somewhere between 4-5% in U.S. Goal 2: Model what happens to macroeconomic equilibrium when there are changes in AD and AS Increases in AD: Demand-Pull Inflation -economy is operating at full-employment -business and government decide to increase their spending -AD curve shifts to the right Macroeconomic Equilibrium Per 6 Page 2 -move from P1 to P2 causes inflation (demand-pull) -move from Qf to Q1 is GDP Gap, not reaching our economic potential Decreases in AD: Recession and Cyclical Unemployment -Example: Business spending decreases -AD would decrease and shift left Macroeconomic Equilibrium Per 6 Page 3 -Movement from Qf to Q1 is a recession -less workers are needed causing cyclical unemployment Decreases in AS: Cost-Push Inflation -Example: Major terrorist attack on oil facilities -Drives oil prices up 300 percent -high energy prices would drive up production costs and distribution costs -AS curve would shift left -movement from P1 to P2 is Cost-Push Inflation -movement from Qf to Q1 is a recession Macroeconomic Equilibrium Per 6 Page 4 Increases in AS: Full employment with price stability -From 1990 until 2000 U.S experienced growth without much inflation -both AD and AS increased Exit Question: What happens to the economy if there is a decrease in AS? Macroeconomic Equilibrium Per 6 Page 5