Equilibrium of AS & AD

- determined by current output of real GDP

• Full Employment (FE)
• equilibrium exits when AD intersects SRAS and LRAS at the same point
• ex :

• LRAS curve (as shown above) represents a point on an economy's production possibility  curve
• LRAS is ALWAYS vertical and is ALWAYS stable at Full Employment
• LRAS doesn't change as price level changes
• LRAS only shifts if there is :
1. ∆ in resources
2. ∆ in technology
3. ∆ in economic growth

• Recessionary Gap
• exists when equilibrium occurs below full employment output
• ex :

• AS decreases at recessionary gap
• a gap that exists whenever equilibrium of real GDP per year is less than full employment real GDP as show by the position of SRAS (?)

• Inflationary Gap
• exists when equilibrium occurs beyond full employment output
• ex :

• AD increases at inflationary gap 

• C, Ig, G, and/or Xn - Expenditure Approach, Aggregate Demand, Real GDP = a type of output