Unit 4: Aggregate Equilibrium and Economic Growth
In this unit, we explore aggregate economic equilibrium in the short run and the long run. At a macro level, equilibrium is the point where aggregate supply equals aggregate demand. We examine shifts in aggregate supply and aggregate demand, and the short-term and long-term effects for the entire economy.
Also in this unit, we explore economic growth. Economic growth is the process of increasing the potential level of GDP (the level of production occurring at the natural rate of unemployment)
Completing this unit should take you approximately 4 hours.
Upon successful completion of this unit, you will be able to:
- examine how aggregate demand and aggregate supply together determine the equilibrium price level and level of real GDP;
- apply the AD-AS model to explain demand pull inflation, cost push inflation, and recession;
- Understand the meaning of recessionary and inflationary gaps and relate them to the natural rate of unemployment and potential income;
- examine the beliefs of different schools of thought about the shape of the aggregate supply curve; and
- Define economic growth and link it to the labor market and the long-run aggregate supply curve.
4.1: Short-Run and Long-Run Macroeconomic Equilibrium
Review these sections, which show graphically recessionary and inflationary gaps and relates them to the labor market. Various policy choices are also discussed that address issues in the economy that result from these gaps.
The following video explores the labor market effects and role in creating short-run recessionary or inflationary gaps, and in re-establishing long-term equilibrium in the economy.
The following two videos discuss how inflation can happen in the economy. They discuss the specific cases of cost-push inflation and demand-pull inflation. Note which of the two curves - Aggregate Demand or Aggregate Supply - causes the inflation problem in each case. The second video discusses a specific case from our history - the demand-pull inflation that occurred in the U.S. under President Johnson.
The following two videos examine different schools of economic thought with respect to shape of the aggregate supply curve. Is there a way to reconcile these beliefs with a unifying theory? Watch these videos to gain perspective on the challenges of explaining and addressing economic problems over the years.
- Make forum posts: 1
4.2: Economic Growth
This chapter analyzes economic growth by examining the aggregate production function. Sources of economic growth are identified and growth rates of different countries are compared.
Robert Solow won the Nobel Prize in Economics in 1987 for his work in providing a framework and theory with which to think about all aspects of economic growth.
This simulation provides a simplified way to think about economic growth and how savings, depreciation, and population growth – or more precisely, the resulting growth in the labor force – all affect growth.
It is important to recall that in the Keynesian model, Saving = Investment = Business Spending. Depreciation is the using up of Investment. This model shows investment growing by the rate of saving and shrinking by the rate of depreciation. In our economy, consumers save about 5% of their income, while businesses tend to "save" (read: invest) more. Some societies save up to 15% of their income!
Once you have downloaded the software to your desktop, open the simulation and read the introduction. Experiment with each slider, examining what happens when depreciation increases or decreases or population increases or decreases. Look at the rate of saving slider, too, and note that .05 is 5%.
The model shows the relationship between capital/worker and economic growth. Remember this is a very general conceptual model and only shows general trends and possible issues that a growing economy could encounter.
As you examine various scenarios and their overall consequences, think of where the US may fit within the conceptual framework. Are we re-investing too little? Are we replacing capital as it depreciates or just consuming that capital with little thought of replacement?
Back up with your claims with evidence from the simulation and background from the other course resources. Consider posting your conclusions in the course discussion forum, and be prepared to defend your position!
Read this chapter, which explains various approaches to achieving economic growth. This reading also introduces the roles of government and other factors relevant to defining and sustaining increases in the production possibilities frontier, in real GDP, or both over time.
The following two videos discuss the topic of economic growth in more details. The second video walks you through calculations of economic growth under different scenarios for growth rates.
- Receive a grade
Take this quiz to check your understanding of the components of GDP.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.
- Receive a grade
Take this quiz to see how well you understand aggregate expenditure and the aggregate demand model of GDP.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.