The AS/AD Model

The equilibrium of AS & AD determines current output (GDPr) and the price level (PL)

Full employment 

• Full-employment equilibrium exists where AD intersects SRAS & LRAS at the same point

Inflationary Gap

• Output is high and unemployment is less than NRU 
• Actual GDP above potential GDP 

Recessionary Gap 

• Output low and unemployment is more than NRU 
• Actual GDP below potential GDP