Stable Equilibrium Condition Level

Question: Discuss about the Stable Equilibrium Condition Level. Answer: Introduction Typically, a stable economic equilibrium occurs at an output level in which the aggregate demand curve for goods and services intersects with both the long run and short run aggregate supply curve. Mainly, this is due to the fact that the point of intersection between the three curves represents the optimal level of output and price in the economy. As such, the optimal point denotes the level of full employment equilibrium. Notably, the level of growth and the prevailing employment rate is at the target level. In addition, there are no fluctuations in the economy that may create pressure to increase the price level or change the level of output being produced within the economy. For this reason, the economy remains at stable equilibrium at the point where the LRAS, the aggregate demand curve, and the SRAS all intersect. A stable economic equilibrium necessitates that all factors in the economy are stable and the economy is operating at an output level that allows full employment equilibrium. At this point, the level of inflation, as well as the level of unemployment, must be maintained at minimal levels. Additionally, the economy must be operating at long term equilibrium where there are no pressures in the economy to change prices or the level of output. Furthermore, the output produced must be equal to the potential level output (Macroeconomic Phenomena, n.d.). By and large, the aggregate demand curve graphically represents the connection between the prices and the amount of real output demanded by the government, firms, and households, ceteris paribus. It also caters for the net exports (Aggregate Demand, n.d.). Likewise, the SRAS depicts the connection between price level and the amount of real GDP supplied over the short term. On the other hand, the LRAS curve illustrates the connection between the prices in the economy and the real GDP quantity supplied in the long term. Essentially, the LRAS depicts that over the long term period, the rise in price levels do not affect the level of real GDP in the economy (Mayer, 2016). It is important to note that in the short run, the level of real GDP attained may either be above or below the potential GDP that can be achieved by the countrys economy. However, in the long run, macroeconomic equilibrium is achieved. At this point, the level of real GDP obtained in the economy equals the potential level of GDP in the country. Particularly, this is attributed to the fact that as the amount of output moves towards the potential real GDP, the level of unemployment is also reduced and moves towards the natural level of employment in the long term. Short-Run Equilibrium Normally, the short-run equilibrium output is either less than or more than the potential output level of the economy. In this case, the economy is unstable, and the level of prices and output keep fluctuating in a bid to establish temporary equilibrium. Basically, when the output level is below the long term equilibrium, a deflationary pressure arises. Mainly, this is because there is a downward pressure exerted on the prices, forcing them to fall. Consequently, this brings about a recessionary gap in the economy. For as long as the recession exists, the economy remains unstable as prices and real GDP fluctuate until an equilibrium is achieved in the long run. On the other hand, when the attained output is greater than the potential output, inflationary pressure may arise. Particularly, this occurs because there is a gap between the achieved real GDP and the potential output of the economy creating instability in the economy. Thus, the economy remains unstable in the short run until a long term equilibrium is obtained at the point where the aggregate demand curve, LRAS, and SRAS all meet. Fundamentally, this concept is best explained using the neo-classical school of thought. In this model, the LRAS curve shows the level of output that can be obtained within a given economy over the long term period (Mayer, 2015). The long run equilibrium is attained at the point where all the three curves intersect. At this optimal point, the economy is operating at full employment. Additionally, both the factor market and the goods market are believed to have cleared. What is more, the labor market is also cleared as all the available workers are employed at the prevailing market wage rate (Khan, n.d.). At the point of intersection, the economy is operating at the potential output level. However, the area to the left of the LRAS curve occurs when the economy is operating below the possible level. There is also a recessionary gap. Thus, there is additional room to increase performance levels to obtain more output. As a result, various economic forces work together to adjust prices, wages and output to bring the economy to a stable equilibrium. Similarly, the area to the right of the LRAS shows the economy is operating above the potential real GDP level (Michaillat Saez, 2013). In turn, this creates inflationary pressure. Prices, real wages, and output continue to increase. Conclusion Often, the government is forced to instigate expansionary fiscal and monetary policies during times of recession and contractionary policies during inflation to bring the economy to full employment level. Through this policies, the government is able to regulate the level of output in the economy and direct it towards long term equilibrium. By and large, the policies result in slowing or stimulating growth in the economy to move towards optimal levels. It is only after the optimal level is achieved in the long term that the economy attains a stable economic equilibrium. Notably, this point occurs only at the point where the LRAS and the SRAS curves intersect with the aggregate demand curve. References Aggregate Demand and Aggregate Supply. Lardbucket.org. Retrieved 9 January 2017, from https://2012books.lardbucket.org/books/macroeconomics-principles-v1.1/s10-aggregate-demand-and-aggregate.html Khan, S. Aggregate demand and aggregate supply. Khan Academy. Retrieved 9 January 2017, from https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic Logan, C. (2016). Macroeconomics Unit 3 part 5. Doc slide. Retrieved 9 January 2017, from https://docslide.us/documents/macroeconomics-unit-3-part-5-pl-qrealgdpy-ad-lras-pl-1-yfyf-sras-y1y1.html Macroeconomic Phenomena in the AD/AS Model. Whitenova.com. Retrieved 9 January 2017, from https://www.whitenova.com/thinkEconomics/simul.html Mayer, D. (2016). AP Macroeconomics by David Mayer. Slideplayer.com. Retrieved 9 January 2017, from https://slideplayer.com/slide/2438942/ Michaillat, P. Saez, E. (2013). A Model of Aggregate Demand and Unemployment (1st ed., pp. 5-21). Massachusetts: Cambridge. Retrieved from https://eml.berkeley.edu/~saez/michaillat-saezNBER13july.pdf Moore, L. (2016). Chapter 9- Aggregate Supply, Aggregate Demand Is the market economy of U.S. stable? How do we know? What can keep the economy stable? Government or Private. Slideplayer.com. Retrieved 9 January 2017, from https://slideplayer.com/slide/9551598/ Pettinger, T. (2011). Difference between SRAS and LRAS. Economics Help. Retrieved 9 January 2017, from https://www.economicshelp.org/blog/2860/uncategorized/difference-between-sras-and-lras/