Aggregate Demand (AD), Short-run Aggregate Supply (SAS), and
Long-run Aggregate Supply (LAS) can all be represented on a
graph as a curve. The AD curve is downward sloping, the SAS
curve is upward sloping, and the LAS is a vertical line. The
point at which either AD intersects SAS or AD intersects LAS is
called the equilibrium point. Sometimes AD is below the
potential output because not all of the resources in the economy
are being fully used. The amount that equilibrium output is
below potential output is called the recessionary gap. For
example if potential output is 1,500,000 and the equilibrium
output is 1,000,000, then the recessionary gap is 500,000. This
occurs when the income is greater than the potential output.
There is more demand than is able to be produced. During these
times, inflation rises and trade worsens. To help control
inflationary gaps, the government will use fiscal or monetary
policies. The situation of the inflationary gap cannot last long
because resources are being over utilized an