After deriving the aggregate demand and the aggregate supply curves, now we are in a position to determine macroeconomic equilibrium. i.e., simultaneous equilibrium of the price level and GDP.

The equilibrium of the price level and the GDP is determined at a point where the aggregate demand curve intersects the aggregate supply curve as.


In the macroeconomic equilibrium is attained at point E₀ where the aggregate demand curve AD intersects the aggregate supply curve SRAS. At the equilibrium point the level of GDP is Y₀ and the price level is P₀. It implies that the total output produced by the firms as shown by SRAS curve equals the desired spending, as shown by AD curve.

(i)    If the price level is less than the equilibrium level, suppose P₁, the desired level of output that the firms would like to produce and offer for sale will come down to Y₁, whereas the private desired spending at a lower price P₁ would rise to Y₂ . In other words, the desired level of output at a price below the equilibrium level will be less than the desired pending. Consequently, the firms will be induced to increase the output (GDP) until it reaches the equilibrium level Y₀.

(ii)    Similarly, if the given price level is more than the equilibrium price level P₀, the desired level of output will exceed the desired spending. Since the aggregate supply exceeds aggregate demand, the firms will have to decrease the level of output and supply less until it reaches the equilibrium level Y₀.

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