• Discuss how the economy returns to equilibrium in response to changes in aggregate demand (AD) and aggregate supply (AS) in both the short run and long run.

Short Run

According to Khan Academy, a short run equilibrium is when the aggregate amount of output demand is equal to the aggregate amount of output supplied. You have to use the AD-As model. you can find the short-run equilibrium by the point at which AD intersects SRAS. The equilibrium is the price level and the output.

Long Run

According to open.lib.umn.edu, "the natural level of employment occurs where the real wage adjusts so that the quantity of labor demanded equals the quantity of labor supplied. When the economy achieves its natural level of employment, it achieves its potential level of output. We will see that real GDP eventually moves to potential, because all wages and prices are assumed to be flexible in the long run."

The economy will return to equilibrium in response to changes in the aggregate demand (AD) and aggregate supply (AS) in both the short and long run. With the long run, the economy can achieve its natural level of employment and potential output at any price level.

References:

1. https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/national-income-and-price-determinations/equilibrium-in-the-ad-as-model-ap/a/lesson-summary-equilibrium-in-the-ad-as-model
2. https://open.lib.umn.edu/principleseconomics/chapter/22-2-aggregate-demand-and-aggregate-supply-the-long-run-and-the-short-run/

Do you agree or disagree with the discussion?