Equilibrate

[Walras] was well aware of the indirect influences of the changes in the other prices, but he assumed that these influences were some equilibrating and some disequilibrating, so that up to a certain point they cancelled each other out; hence the prevailing effect war the stabilizing one of the ‘own’ price.

The perfectly competitive new classical models that we analyzed in chapters 13 and 14 are examples of DSGE models in which wages and prices are perfectly flexible and equilibrate both the product and labor markets.

Their equilibrium level is due to both trend inflation and r#42;, the real neutral rate of interest that equilibrates the economy in the long run.