Macroeconomic Equilibrium

Macroeconomic Equilibrium

• Macroeconomic Equilibrium occurs when AD and AS are equal
  • This means that there is no reason for the economy’s output and price level to change, as total domestic output and the price level will be stable

• If AD > AS, then it would mean that there is a shortage of goods and services
  • Firms’ stock would decline, and the excess AD would encourage them to expand their output and maybe push up the price level (depending on the capacity)
  • Economic forces would basically try and shift the economy back into macroeconomic equilibrium
• If AS > AD, then the existence of unsold goods and services would cause AS to contract, and perhaps the price level would fall (depending on the level of capacity)
  • Price level may fall, but it can be ‘sticky’ (inflexible downwards), as workers would try and resist a cut in their wages