AD-AS Equilibrium

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    Macroeconomic equilibrium occurs at the intersection of AD and LRAS. The diagram below shows macroeconomic equilibrium, the equilibrium price level is P* and equilibrium real GDP is Y*.

    As Keynes posits, the economy could be in equilibrium at full employment but is likely to be in equilibrium below full employment.

    An increase (decrease) in AD shifts AD right (left), increases (decreases) the price level and increases (decreases) real GDP.

    An increase (decrease) in LRAS shifts LRAS right (left), the price level decreases (increases) and real GDP increases (decreases).

     

     

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