Real GDP In the Short And Long Run

• In the short-run GDP equilibrium and price level are determined by the intersection of the AD and the SRAS curves.
• In the long-run the potential GDP gives the equilibrium level of GDP as indicated by the vertical LRAS curve, and only the price level determined by the intersection of the AD and LRAS curves.
  

Position of the LRAS and the potential GDP level Yf is determined by the past economic growth and can change only with economic growth (steady increase in growth rate of output due to technological improvements increase supply resource, capital formation, etc.,) in future. Deviations of actual GDP for the given potential, short-run inflationary and recessionary gaps are associated with business cycles, i.e., periods of booms and recessions before the economy returns to its potential level of output. Thus, changes in total real context, we can discuss two ways in which GDP can be increased, viz.,

• increase in aggregate demand and
• increase in aggregate supply.