Aggregate Demand, Aggregate Supply, and Macroeconomic Equilibrium

Aggregate demand is the total spending on goods and services in an economy ( $AD = \text{real GDP}$ ).
Components of AD: $AD = C + I + G + NE$ .
The AD curve shows the relationship between the aggregate price level ( $P$ ) and quantity of output demanded ( $Y$ ).
The AD curve slopes downward due to: - The wealth effect. - The interest rate effect. - The foreign purchases effect (Foreign price effect).
Factors shifting the AD curve: Changes in expectations, changes in wealth, existing stock of physical capital, fiscal policy, and monetary policy.

Aggregate supply is the total supply of goods and services in an economy.
Short-run Aggregate Supply (SRAS): The relationship between price level and output supplied during the period where production costs (like nominal wages) are fixed.
Factors shifting SRAS: Changes in commodity prices, nominal wages, and productivity.
Long-run Aggregate Supply (LRAS): The relationship between price level and output supplied when all prices and nominal wages are fully flexible; it is vertical at potential output ( $Y_P$ ).

Purpose: Explains business cycle fluctuations, economic growth, and inflation trends.
Short-Run Macroeconomic Equilibrium: Occurs when the quantity of aggregate output supplied equals the quantity demanded ( $AD = SRAS$ ).
Long-Run Macroeconomic Equilibrium: Occurs when the short-run equilibrium point resides on the $LRAS$ curve.

Recessionary Gap: Occurs when aggregate output is below potential output (Y < Y_P).
Inflationary Gap: Occurs when aggregate output is above potential output (Y > Y_P).
Output Gap Formula: $\text{Output gap} = \frac{\text{Actual aggregate output} - \text{Potential output}}{\text{Potential output}} \times 100$

Question: Based on the following data (Actual aggregate output $120\,000\text{ million levs}$ , Potential output $100\,000\text{ million levs}$ ), determine whether there is a recessionary or inflationary gap in an economy.
Answer: Since actual output ( $120\,000\text{ million levs}$ ) is greater than potential output ( $100\,000\text{ million levs}$ ), the economy is experiencing an inflationary gap.