# 7 questions on "The AD-AS Model - Long Run Macroeconomic Equilibrium"

- We call it the Long run macroeconomic equilibrium
- it is the intersection of all three curves the LRAS, SRAS, and, AD
- short run equilibrium is equal to potential output

- The aggregate demand falls, and shifts leftward
- this leads to a lower equilibrium aggregate price level at and a lower equilibrium aggregate price level
- so it settles at the short run equilibrium E2
- but this point is below output so the economy is facing a recessionary gap
- recessionary gap occurs when there is high unemployment

- The economy face high unemployment,
- nominal wages fall
- producers then increase output, because of reduced costs
- leading to a shift of the SRAS curve to shift to the right until the economy get back to E3 or the long run equilibrium

- There will be an increase in aggregate demand
- initially we have the short run aggregate supply curve that is at the LR macroeconomic equilibrium
- now the AD rises and the AD curve shifts to the right
- leading to a higher aggregate price level and a higher aggregate output level
- the new short run aggregate output is now above the potential output
- now unemployment is low and the price level is high, so there is an inflationary Gap

- As there is low unemployment, nominal wages will rise as will other sticky prices.
- the inflationary gap causes the short run aggregate supply curve to shift gradually to the left as producers reduce output, because of higher nominal wages
- bringing the economy through leftward shifts of the SRAS curve to a new position where AD= AS=LRAS where all three intersect at E3
- at E3 the economy is back in the Long run macroeconomic equilibrium

the output Gao is the difference between actual aggregate output and potential output

(actual aggregate output - potential aggregate output)/ potential output)*100

the output gap always tends to go back towards zero

- We say the economy is self correcting
- because shocks tp the aggregate demand affects the aggregate output in the short run but not in the long run

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