Macroeconomics Non Walrasian Approach

Question: Discuss about the Macroeconomics for Non Walrasian Approach. Answer: Introduction: In introduction it can be said that an economy which is operating at the equilibrium level, will have its most efficient short run price level and output level as the long run equilibrium. The economic variables which measure the equilibrium are short run demand and supply and long run demand and supply. A time period is termed as the short run when at least one factor of production is fixed and the other factors are variable. In the long run, all the factors of production are variable(Mankiw, 2014). The purpose of this answer is to explain why a stable economic equilibrium shows the economy operating at an output level at which the aggregate demand curve, the long run aggregate supply curve and the short run aggregate supply curve all intersect. In macroeconomics, the natural level of employment is responsible for the long run equilibrium out to be at its potential level. The quantity of labour supplied and demanded has to be equal, which will provide the equilibrium wage and employment. With equilibrium in the employment market the equilibrium in the Gross Domestic Product (GDP) will follow. This process of finding out the equilibrium situation in the market is done automatically. This phenomenon is thus termed as the invisible hand of the market by J.M. Keynes(Bernanke, Antonovics, Frank, 2015). The process starts in the short run. The short run equilibrium is depicted in the figure below: As the above picture shows, the Short Run Aggregate Supply (SRAS) curve is upward sloping which means the firms will produce more to achieve higher revenue as the price rises, other thing remaining constant. The SRAS curve shifts when people expect the future price level will change, adjustments are done according to the past errors, and significant change in natural resources occur(Temin Vines, 2015). Aggregate demand is the downward sloping curve which shows the relationship between the price level and output that is demanded by the households. The intersection of these two curves gives the equilibrium level of output and price which are Qe and Pe. Changes in government policies, changes in the expectations of the households and their taste and preferences are the reason the aggregate demand changes(Frisch Worgotter, 2016). Both of the supply curve and the demand curve shifts when anything other than the price level changes. The long run aggregate supply curve (LRAS) shows the relationship between the level of price and quantity being supplied in the long run, when there are no fixed factors of production. The long run supply is not affected by the price level as shown in the figure below: As the figure above shows, the change in price level from P1 to P2 has no effect on the equilibrium output Qe. It is the potential GDP of the economy. The potential GDP changes as the available resources change in the economy, technologies used in production change, and machineries and equipments change(Scarth, 2014). In an economy all these curves intersects at the equilibrium level, and even if a change occurs due to any change in the economy, the equilibrium again moves back to its original position which represents the potential output. The situation is depicted in the figure below: The above figure shows the initial equilibrium level of price at P1 and output at Qe at equilibrium point A. Qe is the potential GDP of the economy. If the investment in the economy or any other economic variable goes down, it will result in a leftward shift of the demand curve. As a result the equilibrium will shift to B from A. This is not the potential equilibrium. This will cause a recession. This situation will trigger the firm workers to adjust to the new price level of P2. This price level is lower than the expected(Benassy, 2014). The cost of production will also fall due to this response. This whole situation will cause the short run aggregate supply shift to the right as more will be supplied by the producers at low cost. This will again move the equilibrium to the point C. At this level the potential GDP Qe is attained. But the price falls to the level P3. Hence the economy pushes the market back at the stable point where the LRAS, SRAS, and the aggregate demand intersects (Hubbard O'Brien, 2015). As the figure above shows, if the demand in the economy increases due to any economic reasons, the aggregate demand will shift outwards from F to E. This will increase the price level and the output will be above the potential level. To meet that level of demand and price level, the producers will reduce the supply following the rise in cost(Wray, 2015). The equilibrium again will move from E to D. Hence, the stability will again pull back the output to the potential and the price will rise to P3. In conclusion it can be said that the economic equilibrium will always put the economy operating at the potential level of output where the aggregate demand curve, the long run aggregate supply curve and the short run aggregate supply curve all intersect. The reason behind this is, the change in the demand will be followed by a change in the supply. The producers will employ accordingly. Hence, the natural rate of employment will ensure that the natural level of output is followed. The SRAS and the Demand curve will follow the short run shocks till the equilibrium becomes stable. References: Benassy, J. P. (2014). Macroeconomics: an introduction to the non-Walrasian approach. . Academic Press. Bernanke, B., Antonovics, K., Frank, R. (2015). Principles of macroeconomics. . McGraw-Hill Higher Education. Frisch, H., Worgotter, A. (2016). Open-Economy Macroeconomics. . Springer. Hubbard, R. G., O'Brien, A. P. (2015). Macroeconomics. Pearson: . Mankiw, N. G. (2014). Principles of macroeconomics. . Cengage Learning. Scarth, W. (2014). Macroeconomics. . Books. Temin, P., Vines, D. (2015). Comments on Paul Davidson's' Full Employment, Open Economy Macroeconomics, and Keynes General Theory: Does the Swan Diagram Suffice?'. Institute for New Economic Thinking Working Paper Series, 36. Wray, L. R. (2015). Modern money theory: A primer on macroeconomics for sovereign monetary systems. . Springer.