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Stable Economic Equilibrium

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Added on  2019-10-30

Stable Economic Equilibrium

   Added on 2019-10-30

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Running head: STABLE ECONOMIC EQUILIBRIUM1Stable Economic EquilibriumStudent’s nameProfessorCourseDate
Stable Economic Equilibrium_1
STABLE ECONOMIC EQUILIBRIUM2IntroductionEconomic equilibrium entails a condition in which economic variables are balanced. In the absence of external shocks, the economic forces are known to remain unaffected from their equilibrium state. Economic equilibrium is said to be stable if it recovers quickly through the functioning of counteracting forces after the occurrence of an external shock. In an economy, equilibrium is achieved at a point where the aggregate expenditure matches the real Gross Domestic Product[ CITATION Hub16 \l 1033 ]. Therefore, this paper makes use of the Keynesian cross model to analyze a stable economic equilibrium. The approaches employed by the government to intervene in the economy are also discussed. Moreover, this article seeks to assesswhether the economy of Australia is at a stable equilibrium. Stable equilibriumReal AggregateExpenditure (EA) Real GDP (Y)Y=AEAEEquilibriumGrowing productionY2YeY1Declining production
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STABLE ECONOMIC EQUILIBRIUM3Macroeconomic equilibrium takes place at Ye. At Ye, the aggregate expenditure equals the real Gross Domestic Product, and it is the only level of production at where there is no tendency to shift as the inventories remain unmoved[ CITATION Oli13 \l 1033 ]. If the aggregate expenditure does not match the real Gross Domestic Product, then the firms in an economy will adjust their output accordingly, and equilibrium will be attained. For example, at point Y2, the real Gross Domestic Product exceeds the aggregate expenditure. The companies in an economy will encounter an unplanned surge in the inventories, and therefore these firms will respond by decreasing their production. On the other hand, at point Y1, aggregate demand exceeds the real Gross Domestic Product. The businesses will experience an unplanned decline in the inventories and will react by increasing their output[ CITATION Wil121 \l 1033 ]. Stabilization PoliciesStabilization policies incorporate the economic instruments employed by the government to offset business cycles to ensure stable economic growth and low levels of unemployment and inflation. During periods of recession and high unemployment, the government often employs expansionary policies to accelerate economic activity[ CITATION Arn13 \l 1033 ]. On the other hand, contractionary policies are deployed deal with inflationary growth.
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