Unit 3.2 · Variations in Economic Activity: Aggregate Demand and Aggregate Supply
Monetarist/New Classical Equilibrium
AO2AO4
Syllabus Requirement
In the long run, output returns to potential due to automatic adjustment; Unemployment at full employment equilibrium is equal to the natural rate of unemployment
Assessment Objectives
AO2Application and Analysis
AO4Use of Appropriate Skills
Summary
The monetarist and new classical perspectives on macroeconomic equilibrium suggest that the economy naturally gravitates towards a long-run full employment output level. This model emphasizes that real GDP is determined by the economy's potential output, which is influenced by various factors, and that price level changes do not permanently affect real output in the long run.