The equilibrium price level and the equilibrium level of real GDP are jointly determined by the intersection of the economy’s aggregate supply and aggregate demand schedules. True or False
The correct answer and explanation is:
Correct Answer: True
The equilibrium price level and the equilibrium level of real Gross Domestic Product (GDP) are jointly determined by the intersection of the economy’s aggregate supply (AS) and aggregate demand (AD) schedules. This is a fundamental concept in macroeconomics.
Aggregate demand represents the total quantity of goods and services demanded across all levels of the economy at various price levels. It includes consumption, investment, government spending, and net exports. Aggregate supply, on the other hand, shows the total quantity of goods and services that producers in an economy are willing and able to supply at various price levels.
The intersection point of the AD and AS curves determines the macroeconomic equilibrium. At this point, the quantity of real GDP demanded equals the quantity of real GDP supplied. The corresponding price level at this intersection is known as the equilibrium price level.
If the actual price level in the economy is above the equilibrium level, the quantity of goods and services supplied exceeds the quantity demanded, leading to excess supply or surpluses. This surplus puts downward pressure on the price level, causing it to fall until equilibrium is restored. Conversely, if the price level is below equilibrium, excess demand causes upward pressure on prices.
Changes in aggregate demand or aggregate supply will shift their respective curves. For example, an increase in consumer confidence may shift the AD curve to the right, leading to a higher equilibrium GDP and price level. A favorable change in technology may shift the AS curve to the right, resulting in increased output and possibly a lower price level.
Therefore, it is accurate to say that the equilibrium price level and equilibrium real GDP are jointly determined at the point where aggregate demand equals aggregate supply.