The main idea of utilizing this AS – AD model is to understand and elucidate changes in price level and real GDP. With the help of this model,we can get a clear idea of business cycle fluctuations by using these variables. In addition to it, this model helps you comprehend about inflation trends and economic growth.
For determining real GDP, the first step is to combine aggregate demand and aggregate supply where price level will be in equilibrium. In case of aggregate supply, there are mainly 2 time frames in this macroeconomic equilibrium.
- Short run equilibrium
- Long run equilibrium