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GDP Price Level

At the equilibrium level of income aggregate spending in the economy equals aggregate output. All along, we have assumed that the general price level remains unchanged. We need to give up this assumption and establish relationship between real GDP and the general price level.

The general price is determined by the intersection of the aggregate demand curve and the aggregate supply curve.

Aggregate demand curve shows, for each price level, the associated level of GDP for which aggregate desired spending equals total output, and is consistent with the level of income generated at the output.

Aggregate supply curve relates the quantity of output supplied to the price level. Short-run aggregate supply curve (SRAS) shows the quantity of output that firms would like to produce and to sell at each price level on the assumption that the prices of all inputs remain constant. The long-run aggregate supply curve (LRAS) plots the desired quantity of output that firms would like to produce after the price level and input prices have fully adjusted to any demand shock.