After equilibrium level of GDP in the short-run and in the long-run we can draw a distinction between the equilibrium conditions in the short-run and the long-run.

1.    In the short-run, macroeconomic equilibrium is determined at a level of GDP and the price level where the AD curve intersects the SRAS curve.

2.    In the long-run, the economy attains equilibrium at potential GDP, i.e., at the position of the vertical LRAS curve, Equilibrium price level is obtained at a point where the AD curve intersects the LRAS curve.

3.    Short-run equilibrium may occur along with some GDP gap-a recessionary gap or an inflationary gap. It implies the divergence between equilibrium GDP and potential GDP.

4.    Short-run equilibrium may occur along with some GDP gap-a recessionary gap or an inflationary gap. It implies the divergence between equilibrium GDP and potential GDP.

5.    Long-run equilibrium is stable and struck after GDP gaps are liquidated. It implies that in the long-run equilibrium actual GDP must coincide with the potential GDP.

The potential GDP (Y*) in the long-run is the result of past economic growth. Any gap between actual and potential GDP causes business fluctuation, i.e., inflation and deflation. Fluctuations in business activities which repeat themselves  after regular intervals are called business cycles.

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