Equilibrium Levels of Real National Output (Y)

Real national output equilibrium is where aggregate demand (AD) intersects with aggregate supply (AS) on an AD/AS diagram. At this point, the economy has an equilibrium price level (PL) and an equilibrium real output (Y).

Short-run equilibrium

In the short run, equilibrium is where AD intersects SRAS(where PLe=Ye). If any component of AD changes, AD shifts left or right and the economy moves to a new short-run equilibrium. If any determinant of SRAS changes, SRAS shifts left or right and the economy also moves to a new short-run equilibrium.

Long-run equilibrium: 

Keynesian view

Keynesian economists argue the economy can settle in long-run equilibrium at different output levels, not always at full employment. 

Changes in equilibrium price level and real output

Changes using the SRAS

Increase in aggregate demand (AD)

Start at equilibrium PL1, Ye. If AD rises (for example, higher consumption), AD shifts AD→ AD1. The economy moves to a new equilibrium with a higher price level (PL2) and higher real output (Y1).

Increase in short-run aggregate supply (SRAS)

Start at equilibrium PLE, YE. If for example costs fall SRAS shifts right from SRAS → SRAS1. The new equilibrium has a lower price level (PL2) and a higher real output (Y2).

Changes using the LRAS

Changes to aggregate demand (AD)

Start at PL1, Ye. If AD rises (for example, higher government spending), AD shifts AD → AD1. If the economy is already close to full employment, this typically causes a large rise in the price level (PLe → PL1) but only a small rise in real output (Ye → Y1).

Classical model LRAS shifts 

Changes in the determinants of LRAS change the economy’s long-run productive capacity. If LRAS shifts right (for example, education improves labour quality), potential output increases YE → Y1 With more capacity, the economy can produce more, and the price level falls (PLe→PL1) as the new equilibrium is reached.

Keynesian LRAS shifts 

In the Keynesian model, determinants still shift LRAS (for example, immigration increases labour supply so LRAS → LRAS1). If AD is positioned so the economy is on the vertical part of the Keynesian LRAS, an increase in LRAS can lead to higher output and a lower price level.

If the economy is stuck at a low-output equilibrium, Keynesian thinking suggests shifting LRAS alone may have limited impact unless AD also increases.