Equilibrium Real National Output (RNO)
The concept of equilibrium real national output
- When injections and withdrawals are equal, there is equilibrium in the economy. It means that there is no tendency to change from the current output level or price level (known as the market clearing price) as there is no excess goods or services.
- The equilibrium is equivalent to when AD is equal to AS (Pe, Ye) because the market is cleared (meaning there is no excess).
- As soon as there are more injections than withdrawals, the expenditure in the economy increases and as a result so does output and income.
- However, as supply has stayed the same, the price levels in the economy increase (Pe to P1) in response to the increased output (AD to AD1) due to market forces in order to eliminate excess.
- When there are more withdrawals than injections, the expenditure in the economy decreases and as a result so does output and income.
- This time as supply stayed same but output decreased, the aggregate demand falls (AD to AD1) and the price levels fall in order to get rid of the excess supply which would be present (Pe to P1).