Equilibrium GDP and Prices - Long-Run Equilibrium

In the long run, the economy will reach its equilibrium GDP and prices. This is the point where the aggregate demand (AD) is equal to the aggregate supply (AS) in the economy. At this point, there is no excess demand or excess supply in the market.

The long-run equilibrium GDP is also known as the potential GDP or full-employment GDP. This is the level of output that the economy can produce when all resources are fully employed. In other words, it is the level of output that can be sustained over the long run without causing inflation or recession.

The long-run equilibrium price level is the price level at which the aggregate demand is equal to the aggregate supply. This is the price level that prevails in the economy when there is no excess demand or excess supply.

In the long run, changes in the money supply or fiscal policy will only affect the price level and not the real GDP. This is because the economy will adjust to the new equilibrium level of output and prices. For example, if the government increases spending, this will increase the aggregate demand in the short run, leading to an increase in prices. However, in the long run, the economy will adjust to the new equilibrium level of output and prices.

Overall, the long-run equilibrium GDP and prices are important concepts in macroeconomics as they help us understand the potential output and price level in the economy over the long run.