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Aggregate Demand and Aggregate Supply Equilibrium

If the aggregate demand, short run aggregate supply and long run aggregate supply all meet at the same point, then the economy is in long run equilibrium. The aggregate demand and short run aggregate supply are based on expectations that buyers and sellers have about the price level. At the long run equilibrium, those expectations match with the actual price level that exists. If this is true, then the real GDP in the economy will be the full employment real GDP, also called Potential GDP or Sustainable GDP

About Long Run Equilibrium
If the economy is in long run equilibrium (as shown above), the following are true:
1. Real GDP produced is the full employment or potential or sustainable level.
2. Actual unemployment will be equal to the natural rate (since the economy is at full employment). If you don’t remember what the natural rate of unemployment is, you may wish to review the unemployment concepts.
3. Cyclical unemployment is zero (this is because the economy is at full employment).
4. The price level anticipated by decision makers is equal to the actual price level.

However, if the curves do not all meet at the same point, then there can be a short run, temporary equilibrium in the economy that differs from the long run equilibrium. This means that the amount of output or real GDP of the economy is not the sustainable full employment level. It also means that, at this short run equilibrium, the price level does not match the price level that decision makers had anticipated. This short run equilibrium indicates where the economy actually is. It need not match the long run equilibrium, but if it does not, the equilibrium is temporary.
For example, if the intersection of the short run aggregate supply and aggregate demand is to the right of the long run equilibrium, the following short run equilibrium results.

About Short Run Equilibrium
If the economy is in short run equilibrium that differs from the long run equilibrium (as shown above), the following are true:
1. Real GDP produced is not the full employment or potential or sustainable level.
2. Actual unemployment differ from the natural rate
3. Cyclical unemployment is not zero (cyclical unemployment will be greater than zero if unemployment is more than the natural rate, and cyclical unemployment will be negative if unemployment is less than the natural rate, which can happen in the short run).
4. The price level anticipated by decision makers is different from the actual price level. In the above diagram, decision makers (buyers and producers) expected a price level of 105, but the actual price level at the short run equilibrium is 110.

Obviously, either the aggregate demand curve or the short run aggregate supply curve, or even the long run supply curve must have moved from the previous long run equilibrium for this to happen, which brings us to...
Events that Move the Aggregate Curves
-- Aggregate Demand
There are several events or situations that move the aggregate demand curve to the right or to the left. Before listing these, it is important to keep in mind that a change in the price level alone will not move the aggregate demand curve, because changes in the price level are built into the curve; aggregate demand already indicates to us how various price levels will affect the quantity of goods and services demanded.
However, the aggregate demand curve can shift, as shown below, if something other than the price level changes.

Aggregate demand can increase (moving the curve right) if...
1. the wealth of domestic consumers increases (for reasons other than the price level changing)
2. real interest rates fall (for reasons other than the price level changing)
3. the wealth of foreign consumers rises
4. the foreign exchange value of the dollar falls (making U.S. goods look less expensive to foreign buyers, since it takes less of their money to buy dollars and hence U.S. goods priced in dollars).
5. people expect inflation, and thus expect a higher price level in the future (by this, we do not mean actual inflation, but if people expect a higher price level in the future, they will tend to buy things now)
6. people have increased optimism about the economy (they won't hesitate to spend if they are confident about their future incomes)

Aggregate demand can decrease (moving the curve left) if...
1. the wealth of domestic consumers decreases (for reasons other than the price level changing)
2. real interest rates rise (for reasons other than the price level changing)
3. the wealth of foreign consumers falls
4. the foreign exchange value of the dollar rises (making U.S. goods look more expensive to foreign buyers, since it takes more of their money to buy dollars and hence U.S. goods priced in dollars).
5. people expect deflation, and thus expect a lower price level in the future (by this, we do not mean actual deflation, but if people expect a lower price level in the future, they will tend to put off buying things now)
6. people have pessimism about the economy (they will hesitate to spend if they fear for their future incomes)

-- Short Run Aggregate Supply
There are several events or situations that move the short run aggregate supply curve to the right or to the left. Before listing these, it is important to keep in mind that a change in the price level alone will not move the short run aggregate supply curve, because changes in the price level are built into the curve; the curve already indicates to us how various price levels will affect the quantity of goods and services produced in the short run.
However, the short run aggregate supply curve can shift, as shown below, if something other than the price level changes...

Short run aggregate supply can increase (moving the curve right) if...
1. the real prices of resources fall temporarily, enabling more production
2. short term improvements in conditions for production, such as weather, enable more production
3. producers expect a lower price level for their goods in the future, also called deflation (by this, we do not mean actual deflation, but if producers expect a lower price level in the future, they will tend to produce and sell things now, while prices are still high)

Short run aggregate supply can decrease (moving the curve left) if...
1. the real prices of resources rise temporarily, inhibiting production
2. short term worsening of conditions for production, such as weather, inhibit production
3. producers expect a higher price level for their goods in the future, or inflation (by this, we do not mean actual inflation, but if producers expect a higher price level in the future, they will tend to hold off on producing and selling things now, and wait for higher prices)

-- Long Run Aggregate Supply
There are several events or situations that move the long run aggregate supply curve to the right or to the left. Before listing these, it is important to keep in mind that a change in the price level will not move the long run aggregate supply curve.
However, the long run aggregate supply curve can shift, as shown below...

Long run aggregate supply can increase (moving the curve right) if...
1. the supply of available resources rises permanently, increasing production capability
2. institutions, such as the legal system, transportation improvements, communications systems, and other infrastructure allow for a permanent increase in production
3. new technology and its applications permanently increase production capabilities of the economy

Long run aggregate supply can decrease (moving the curve left) if...
1. the supply of available resources falls permanently, decreasing production capability (for example, a terrorist attack destroys workplaces and kills workers)
2. institutions, such as the legal system, transportation infrastructure, or communications networks degrade or otherwise change to permanently decrease production capability
3. outmoded or inappropriate technology is forced on producers, permanently decreasing production capabilities of the economy (for example, the Taliban forbade the use of most modern techniques in Afghanistan)