Macro equilibrium
Where planned injections equal withdrawals (or AD = AS).
Equilibrium level of real output
Key definitions
SR equilibrium
AD = SRAS determines PL and real output.
Inflationary gap
Equilibrium above LRAS / positive output gap.
Recessionary gap
Equilibrium below LRAS / negative output gap.
Classical adjustment
Wages flexible → return to Yfe.
Keynesian persistence
Sticky wages — may stay below Yfe.
Squeezing inflation
Contractionary policy to reduce AD inflation.
Spare capacity
Firms can expand output without much price rise.
Bottleneck inflation
AD rise mainly raises prices near capacity.
Time lags
Policy takes months/years to affect equilibrium.
Key concepts
Always state whether using Classical or Keynesian framework.
Evaluate spare capacity when judging policy.
Relevant tips
- Diagram backlog: AD/SRAS/LRAS equilibrium; output gaps.
- Link to 2.5.2 output gaps topic.
Examples & case studies
- Diagram backlog: Classical vs Keynesian equilibrium adjustments.