Macroeconomic Equilibrium

When someone is talking about the macro-economy, they’ll use the term “aggregate,” which basically means “the total you get from adding up all of these smaller things in a country.”

Aggregate supply is the total amount of stuff we (as a country) sell, and that aggregate demand is the total amount of stuff we (as a country) want to buy. When aggregate supply and aggregate demand meet, it’s like a macro When Harry Met Sally...what we call an “equilibrium.” If we’re talking macroeconomic equilibrium, it means the aggregate supply and the aggregate demand are the same amount.

Let’s use a microeconomic example to make this intuitive: pizza. If a pizza company sold pizza that was too expensive, it would end up with too many unsold pizzas. If a pizza company sold pizza that was too cheap, then it would run out of pizzas, which means it’s missing out on selling more. What’s the right price to set the pizza? Where the number of pizzas created (supply) is equal to the number of pizzas that people buy (demand).

In general, the economy moves back and forth across the equilibrium, always trying to aim for it. But the economy overcorrects sometimes, and things in the economy change, so it’s not reasonable to expect that we’re always on point on our equilibrium. It is reasonable to expect that everyone in the White House knows what “macroeconomic equilibrium” means though.