3.2.6—Macroeconomic equilibrium

Short-run macroeconomic equilibrium is the AD–AS intersection; compare its output with potential output to identify a recessionary or inflationary gap.

In the monetarist/new-classical model, a recessionary gap lowers employment and wages, reducing costs and shifting SRAS right until output returns to potential. In the Keynesian model, wages may be sticky downwards, so weak confidence and demand can leave the gap persistent.

If a fall in consumption shifts AD left, output can move below potential. The classical prediction is eventual full-employment output at a lower price level; the Keynesian prediction allows a long period of low output and unemployment.

Read the intersection first, measure the gap against potential output, then state which model assumptions justify the adjustment story.

Equilibrium means plans are mutually consistent; it does not guarantee full employment, zero unemployment or a fair outcome.

In the monetarist/new-classical long-run diagram, AD, SRAS and vertical LRAS meet at potential output. Automatic wage and cost adjustment moves SRAS until that point is restored; full employment still includes frictional, structural and seasonal unemployment, whose sum is the natural rate. In the Keynesian model, the AD–AS intersection can remain below full-employment output because downward wage and price adjustment may be weak, so equilibrium need not eliminate a recessionary gap.