Equilibrium in the AD-AS Model

Short Run Equilibrium

The current level of national output (GDP) and price level given the levels of Aggregate Demand (AD) and Short-Run Aggregate Supply (SRAS) for a particular period of time.

Negative Output Gaps

When output is below full employment, resulting in higher unemployment, falling wages, deflation, and reduced confidence.

Full Employment

The state where current output equals the full employment output, with the AD curve, SRAS curve, and LRAS curve all intersecting.

Positive Output Gaps

When output exceeds full employment, leading to higher prices, rising wages, less capacity, and reduced economic growth.

Aggregate Demand Shocks (Positive)

An increase in AD resulting from higher consumption, investment, government spending, or net exports, leading to demand-pull inflation.

Aggregate Supply Shocks (Negative)

An increase in the cost of production, resulting in higher prices and reduced output due to cost-push inflation.

Economic Growth

An increase in a nation’s actual and potential output over time, calculated as the growth rate.

Short Run Economic Growth

Occurs when only Aggregate Demand (AD) increases.

Long Run Economic Growth

Occurs when both Aggregate Demand (AD) and Aggregate Supply (AS) increase.

Recessionary Gap

A situation where demand decreases, causing deflation and a decrease in prices and output.

Inflationary Gap

Occurs when demand increases resulting in increased prices and output.

LR Self-Correction

The process by which output returns to its natural rate despite short-term fluctuations in demand.