Question

Macroeconomic goals and macroeconomic equilibrium are the key elements in macroeconomics.

1. What are the long-run macroeconomic goals? What is long-run macroeconomic equilibrium? How the goals are relate to the macroeconomic equilibrium?
2. Suppose that consumers and investors become pessimistic about the future health of the economy. What will happen to aggregate demand and to output?

Answer 1

The key elements in macroeconomics are the achievement of macroeconomic goals and macroeconomic equilibrium in the long run. Both these concepts are interrelated, the goals are achieved when the macroeconomic equilibrium established. The equilibrium situation established when the aggregate demand and the aggregate supply becomes equal in the long run. These long-run macroeconomic goals are mainly three types i.e. Full employment, Stability, and Economic growth. These goals are explained below.

Full Employment: This is the situation where all the resources (i.e. Labor, Capital, Land, and entrepreneurship) in an economy are fully employed or used for the purpose of production of goods and services. This full employment mainly shows through the employment of labor in the theory of effective demand in macroeconomics. The full employment achieved when the aggregate demand becomes equal to the aggregate supply.

Stability: It implies the situation where the fluctuations in employment, production, and prices are minimized. That is in the long run when aggregate demand and aggregate supply becomes equal, fluctuations in case of employment, production and prices, as well as income, become minimum. This is because all the resources fully employed at that situation.

Economic growth: The another long run macroeconomic goal is the economic growth that shows in terms of production of goods and services. When, in the long run, stability comes in case of employment, production, and prices, the economy's ability arises to grow at a higher rate. That is an economy able to produce more goods and services. Besides this, economic growth also can be indicated in terms of an increase in the quantities of land, labor, capital, and entrepreneurship.

The three above goals considered as widely beneficial for an economy and society. Achievement of these three goals makes the economy more efficient and equal.

Long run Macroeconomic equilibrium: It has already mentioned that long run macroeconomic equilibrium is that situation where aggregate demand and aggregate supply becomes equal. At that situation equilibrium level of income, output, and employment is determined. The aggregate demand here indicates the total amount of goods and services demanded in an economy in a given period of time at the given prices. Aggregate supply, on the other hand, indicates the total supply of goods and services that various firms willing to sell at the given price in a given period of time.

The long-run goals are related to long-run equilibrium because all the long run goals can be achieved at the point of long-run equilibrium. That is the situation of equalization of long-run equilibrium. The determination of equlibrium level output and income is shown in the figure 1 below.

The figure shows that long-run equilibrium level of income and output is determined at the point of intersection of long-run aggregate demand (AD2) and aggregate supply (LRAS) curve. At the equilibrium point, X2 amount of output is determined.