Explore BrainMass

Explore BrainMass

    General Equilibrium

    General equilibrium is a concept in macroeconomics that seeks to explain the behaviour of an entire economy with respect to its various interacting markets. The basic theory generally includes the goods market and the money market. Both these markets must be in equilibrium to form a general equilibrium. The goods market is represented by the equilibrium between investment and savings. This determines an equilibrium interest rate. This equilibrium interest rate is affected by changes in GDP negatively. In an open economy, the interest rate is determined by the world and the goods market then determines the exchange rate instead. The money market equilibrium is when money supply equals money demand. This gives an equilibrium interest rate which is positively correlated with GDP. The intersection of the money market (LM Curve) and goods market (IS Curve); when they both use the same equilibrium interest rate (or exchange rate depending on the type of economy) is general equilibrium. From this relationship, we can derive aggregate demand. 


    Aggregate demand is the relationship between the price level and the real GDP of an economy at a given time. This general equilibrium can be thought of as a long run macroeconomic equilibrium when the economy is at full employment. A shock to this economy would cause a change in either the IS or LM curve and then result in a change in the aggregate demand function. The economy initially moves to a short run macroeconomic equilibrium defined by the property of an inability for the price level to adjust. Afterwards, long run macroeconomic equilibrium is achieved when price levels adjust which is reflected by a shift of the LM curve causing a return to full employment. 

    Macroeconomic equilibrium has two conditions. The first is that the desired aggregate expenditure is equal to actual GDP. This simply means that households are willing to purchase what is being produced (aggregate demand). The second condition is that firms must want to produce the current level of GDP (aggeregate supply). The conditions are fulfilled when both curves intersect.

    If price levels are too high, then there is an excess supply of output and there is an increase in unsold stocks for producers. This means that producers need to cut back on production to avoid excess in inventories. When the price level is below equilibrium, there is an excess demand in the short run, which signals to producers to expand output. Shortages of resources will also lead to a general rise in costs and prices.

    Changes in macroeconomic equilibrium shows how the economy reacts to shocks to the real GDP and price level. Aggregate demand and supply shocks are described by how they impact real GDP. Positive shocks increase equilibrium GDP and negative shocks reduce equilibrium GDP.

    © BrainMass Inc. brainmass.com October 7, 2022, 6:56 pm ad1c9bdddf

    BrainMass Solutions Available for Instant Download

    Money Supply: Six Questions

    True or False (provide an explanation for why). 1) Since the Fed implemented "quantitative easing", the money supply has increased dramatically. 2) If the velocity of money is stable, the Quantitative Theory of Money predicts that inflation rises one-for-one with money growth. 3) A country runs a budget deficit finan

    Monetary tightening or Monetary loosening

    The Fed loosened monetary policy in various ways in 2007, but has recently started tightening monetary policy again. Explain how each instrument they have used works and whether it is a loosening or tightening policy. (1 sentence explanation): 1) Lower the target federal funds rate: monetary tightening or loosening? 2)

    Calculating the Equilibrium Output Level

    The economy of Alphaland is represented by the following: C= 50 +0.25Yd T=1000 G=1000 I=1000 (a) Calculate the equilibrium level of output. Graph your solution. (b) If the government spending increases by 50 what is the new equilibrium level of output? Use the government spending multiplier. (c) If the government incre

    Opportunity cost and specialization

    1) Opportunity cost- You can spend spring break either at home working for $80 a day for five days or go to Florida for the week if you stay home, your expenses will total about $100. If you go to Florida, the airfare, hotel, food, and miscellaneous expenses will total about $700. What's your opportunity cost of going to Florida

    General Equilibrium in the Labour Market

    Data relating to the labour market in a small economy is provided below, where the workforce is shown in thousands: See attached i) If the real wage is 9 euros per hour, determine the levels of employments and voluntary and involuntary unemployment ii) assuming that the real wage is flexible, what are the equilibrium wage

    Objectives of Monetary Policy

    What are the basic objectives of monetary policy? Comment on the cause-effect chain through which monetary policy is made effective. What are the major strengths of monetary policy?

    Economics: Demand Elasticity

    Hi James, Guess who? :) I am not sure if you can help me with this one but let me know if you can. Wednesday February 26th is deadline. 600 words The board of directors at AutoEdge is actively discussing several options to address flagging revenue. One option continues to surface during each board meeting; that is, re

    Deriving IS, LM and aggregate demand curves

    The 3 problems are attached in the file below. They are about long-run equilibrium values, short-run values, level of investment and interest rate, amongst other things. Thank you.

    Analyzing the Phillips Curve

    What is Phillips curve? Who was Phillips? What is the relationship between inflation, nominal GDP growth and real GDP growth?

    Aggregate Expenditure Model in Closed Economy

    In the aggregate expenditure model, assume that the consumption function is given by C = 800 + 0.58(Y - TP), that planned investment (I) equals 250, and that government purchases (G) and taxes (TP) each equal 200. Assume that there is no import or export spending. If G is now 300, calculate the equilibrium level of income (to 3

    Westinghouse and General Electric pricing strategies

    Westinghouse and General Electric are competing on the newest version of clothes washer and dryer combinations. Two pricing strategies exist: price high or price low. The profit from each of the four possible combinations of decisions is given in a payoff matrix which can be found in the attachment: a) Which strategy offers b

    Market exchange with production

    Market Exchange With Production The table below shows the quantities of product X that a producer can produce in one growing season on a 1 acre farm using different amounts of labor. The dollar values assume that the land rents for $100 and labor's wage is $300 per growing season. Land Labor Total Output Marginal Produc

    Game Theory and Strategic Behavior

    In 300 words or more, please, provide your response to the attached discussion question. Please, show all your calculations and explain your responses. Describe the circumstances under which a firm chooses a low-cost strategy to attain sustainable competitive advantage. What about the situations when a differentiation strate

    Market Structures and Pricing Decisions

    I need help with the following problems. A small business which produces plastic vacuum-suction covers for round household dishes has a monopoly that is protected by a utility patent. The market demand curve for this product is estimated to be: Q = 6009 - 25P where Q is the number of plate covers per year and P is in doll

    The Price System

    See the attached file for complete problem (along with data). CHAPTER 14 THE CASE FOR FREE MARKETS I: THE PRICE SYSTEM ACTIVITY Reminder: For consumers following the Optimal Purchase Rule: MU=P. Use the Q of chairs and the P (MU) as the Demand Schedule. For firms under conditions of perfect competition, P=M

    Determining reaction function, equilibrium output and market price

    VisiCalc, the first computer spreadsheet program, was released to the public in 1979. A year later, introduction of the DIF format made spreadsheets much more popular because they could now be imported into word processing and other software programs. By 1983, Mitch Kapor used his previous programming experience with VisiCalc to

    Determining market entrance

    Suppose the market demand and supply functions are QD = 430 - 5P and QS = 2P + 318. You have just graduated and moved to this city; as a new MBA and an entrepreneur, you are considering entering the market for this product. a. Determine the equilibrium price and quantity in this market. b. You've researched and found that mo

    Market Equilibrium and the U.S. Housing Crisis

    How does the market equilibrium process play a role in the U.S. housing crisis in terms of: - Law of demand and the determinants of demand - Law of supply and the determinants of supply - Efficient markets theory - Surplus and shortage And is there a way to graph this?

    Negotiation between Management and Labor

    Suppose you have a negotiation between Management and Labor concerning Labor wages. Management and Labor do well when they each do the opposite of what the other does i.e. the best situations for both are: (i) for management to bargain hard (offer low wages) and Labor to accommodate (accepts the contract offered) and (ii) for Ma

    Graph and Overview

    Suppose bread is subsidized in a small Caribbean nation with a high percentage of citizens who live in poverty. The subsidy is paid to suppliers of bread by the government in the amount of 50 pesos per loaf. In the absence of the subsidy, the price of bread would be 100 pesos per loaf. Assuming that the supply of bread is perfec

    Long-Run Equilibrium in Perfectly Competitve Markets

    Suppose at present, firms in a perfectly competitive market are earning negative economic profits (losses). Explain the process by which this industry will reach long-run equilibrium. What will happen to the output produced by the average firm and the prices charged? Why? What will happen to profit?

    Producer, consumer and combined surplus

    Please refer attached file for graph. Suppose the market for watermelons can be described by the graph below. a. If Jon's maximum willingness to pay for a watermelon is $8, how much surplus per unit is he receiving at the market price of $6? b. Suppose Figgy Farms requires at least $5 per watermelon before they will sell

    Effect of Cancellation of Orders on Demand

    Steel producers expect to cut output by 10 percent in 2009 in response to cancelled orders from construction companies and car and household appliance producers. (Source: Financial Times, December 28, 2008.) - Does the cancellation of orders change the demand for steel, the quantity demanded, the supply of steel, or the quant

    Supply and Demand Curves for SUVs, Housing, and Air Travel

    Can you help me with the following five scenarios? Please draw a separate diagram to demonstrate the answer, and describe what happens to equilibrium price and sales, explaining why or why not this makes sense in the real world (Hint: Remember the difference in a change in demand [supply] and a change in quantity demanded [suppl

    Forces of supply and demand pertaining to gas prices.

    The Price of Gasoline Would you rather have the forces of demand and supply determine the price of gasoline which you pay at the pump, or would you prefer a government mandated price ceiling? What problems would a price ceiling on gasoline bring? There are two different schools of thought on how to lower gasoline prices an

    Three Types of Product Differentiation

    (a) Identify two market structures in which product development and product differentiation is an important type of competition for firms operating in those market conditions. (b) Provide examples of three types of product differentiation that could help make a firm in a particular industry more competitive.