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Econ 1002 Introduction to Macroeconomics
Tutorial Assignment #3
Question 2
a) Discuss the shocks that can change a macroeconomic equilibrium.
Points to answering-
- Define macroeconomic equilibrium. (May be useful to draw the diagram although
the question did not ask to illustrate)
- Name the shocks and identify and discuss the causes of the shocks
- As useful to examine the impact of the shocks on equilibrium GDP and price levels.
Macroeconomic Equilibrium: occurs at the intersection of the aggregate demand and
short-run aggregate supply curves to determine the equilibrium values of real GDP and
the associated price level.
A shift of the aggregate demand curve is called an aggregate demand shock. A rightward
shift of the AD curve is a positive shock- increase in aggregate demand. A leftward shift
of the AD is a negative shock- decrease in AD. Causes of AD shocks include:
- Changes in monetary policy
- Changes in Fiscal Policy
- Changes in the GDP components (AD derived from AE curve).
A shift in the short-run aggregate supply curve (SRAS) is called an aggregate supply
shock. A rightward shift of the SRAS represents an increase in aggregate supply- positive
shock. A leftward (upward) shift of the SRAS represents a decrease in aggregate supply-
negative shock. Causes of SRAS shocks include:
- Changes in productivity
- Changes in cost of inputs
b) What is a GDP gap? Identify and name the two gaps that may exist in the
short run and explain the differences between them. Draw two different
diagrams that can illustrate GDP gaps. Which one would you choose to
analyze the macro economy?
GDP Gap: also known as an output gap occurs when the nations actual output diverges
from its potential output.
Recall: intersection of the AD and SRAS shows actual GDP
Position of the long-run aggregate supply curve indicates potential GDP.
Two gaps which may exist in the short run are:
- Recessionary Gap: actual GDP falls short (is less than) potential GDP.
- Inflationary Gap: actual GDP exceeds (is greater than) potential GDP
