IB Economics SL 3.2.6—Macroeconomic equilibrium Topic Practice

• Short-run equilibrium occurs where AD intersects AS

• Monetarist and new classical models determine long-run full employment equilibrium at potential output

• In the monetarist or new classical model, automatic adjustment returns the economy to full employment and unemployment equals the natural rate of unemployment

• In the Keynesian model, deflationary or recessionary gaps can persist

• Diagram: macroeconomic equilibrium in short run and long run

[Maximum number: 10]

Explain how in the Keynesian AD/AS model an economy can be in equilibrium while producing below the full employment level of output.

[Maximum number: 15]

Discuss the view that an economy will always return to the full employment equilibrium level of output in the long run.

[Maximum number: 10]

Using an appropriate diagram, explain why a country might experience a deflationary gap.

[Maximum number: 15]

"An increase in aggregate demand may not lead to an increase in real national income." To what extent is this statement valid?

[Maximum number: 10]

Using the Keynesian AD/AS diagram, explain why an economy may be in equilibrium at any level of real output.

[Maximum number: 15]

Discuss the view that economies will always return to the full employment level of output in the long run.

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Question 3(a)

Question 3(b)

Question 4(a)

Question 4(b)

Question 4(a)

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