Holt 7525-9 S15_IT

Equilibrium Real GDP
In Example 5, what is the actual (equilibrium) Real GDP? In Keynesian theory, equilibrium Real
GDP occurs where Total Expenditures equals Real GDP (total production). On the table in
Example 5, equilibrium occurs at $18,500 billion. But why does equilibrium Real GDP occur
where Total Expenditures and Real GDP are equal?
If Total Expenditures were greater than Real GDP, producers would be selling more than they
were producing. Thus, inventories would decrease. This would signal producers to increase
production. Production (Real GDP) would increase until it was equal to TE. If TE were less than
Real GDP, producers would be producing more than they were selling. Thus, inventories would
increase. This would signal producers to decrease production. Production (Real GDP) would
decrease until it was equal to TE.
Equilibrium Real GDP and the 45° Angle Line
Remember the 45° angle line we used earlier in the chapter to help locate the equilibrium
between consumption and disposable income? We can use the same approach to identify
equilibrium Real GDP. If we add a 45° angle line to the Total Expenditures graph, the Total
Expenditures curve will intersect the 45° angle line at the level of Real GDP where Total
Expenditures and Real GDP are equal. See Example 6 below:
Example 6:
$18.9 -
18.8 -
18.7 -
18.6 -
18.5 -
Total
Expenditures 18.4 -
(Trillions of
dollars) 18.3 -
18.2 -
18.1 -
18.0 - 45°
Z
N
$18.0 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 18.9 19.0
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Real GDP (Trillions of dollars)
TE
Keynesian Economic Theory 8 - 6