3.5 Equilibrium in the Aggregate Demand–Aggregate Supply (AD–AS) Model
Short-run equilibrium is where AD crosses SRAS; if that output sits below LRAS the economy has a recessionary gap, and above it an inflationary gap.
Short-run macroeconomic equilibrium is the intersection of AD and SRAS — it fixes the current price level and real GDP. Long-run equilibrium requires all three curves (AD, SRAS, LRAS) to intersect at the same point, meaning the economy is producing exactly its full-employment output.
Compare short-run equilibrium output to LRAS to name the gap: output below full employment is a recessionary (negative output) gap, with unemployment above the natural rate; output above full employment is an inflationary (positive output) gap, with unemployment below the natural rate and upward pressure on prices.
FRQ graphs here are graded on labels: axes as 'price level' and 'real GDP,' all three curves named, and equilibrium marked with dashed lines to both axes. Show current output and full-employment output as separate points on the horizontal axis when a gap exists.
Key terms for 3.5
Drag the curves yourself — the fastest way to make 3.5 stick.
Marking equilibrium output and full-employment output at the same spot when the question describes a gap. If output is below (or above) potential, current equilibrium must sit visibly left (or right) of LRAS on the horizontal axis.
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