- Using the Keynesian AD/AS diagram, explain why an economy may be in equilibrium at any level of real output - Free Essays on Economics Using the Keynesian AD/AS diagram, explain why an economy may be in equilibrium at any level of real output

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

Aggregate demand can be defined as the total demand to the output a country’s economy at a given time interval and given price level. It is calculated through the formula AD=Consumer Spending (C)+ Investment (I)+ Government Spending (G)+ Exports (X) -Imports (M). Similarly, aggregate supply refers to the total supply of all goods and services produced within the economy at a specific time frame and price level, given the quality and quantity of the factors of production. According to Keynesian model of economics theory, national economies benefit from government intervention while interventionist policies being vital for economies to reach their full levels of employment, given the ability of economies to be in equilibrium at any level of real output. As the diagram above represents, the economy may be in equilibrium at any level of real output. According to the Keynesian model, for an economy to be operating under equilibrium, the point where aggregate demand curve meets the curve of aggregate supply should be identified. As there is no distinction between short and long-run aggregate supply in Keynesian model, equilibrium points are any intersecting regions of the AD and AS curves.
The diagram shows 3 possible points where the national economy is at equilibrium. Although there are infinitely many points where the market equilibrium can be reached, all represent different phases of the national economy. For example, at point 1 where AD1 intersects AS, the economy has significant spare capacity and operates at APL1 and Y1 which is below the levels of full employment (Yf). Similarly, point 2 represents the intersection of AS with AD2, during which the economy is shifted to a higher level of actual output (from Y1 to Y2) without facing noteworthy levels of inflation (persistent rise in average price levels within a given time frame, given the quality and quantity of factors of production) (only shifting from APL1 to APL2). However, at point 2, the economy is not still fully efficient as the spare capacity is still evident, yet reduced. Finally, at point 3 where AD3 meets AS, the economy is now working under full employment (Yf)- where everyone who is willing and able to work is working within the economy at the given time period- despite the average price levels being considerably high, as indicated by APL3. In short, as suggested by the Keynesian model of economic theory, the economy can be operating at equilibrium at any level of actual output while government intervention is required for the economy to move towards full employment, as well as increasing its actual output.



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