Question

In the AD/AS model, what prevents the economy from achieving equilibrium at the potential output?

Short answer

In the AD/AS model, the economy is prevented from achieving equilibrium at the potential output when the level of GDP is less than potential.

Step-by-step solution

Step 1. Definitions.

Aggregate supply is the total quantity of output (i.e. real GDP) firms will produce and sell.

Aggregate demand is the amount of total spending on domestic goods and services in an economy.

Step 2. Explanation

The AD/AS model achieves equilibrium at the level of GDP. In the AD/AS model, the economy is prevented from achieving equilibrium at the potential output when the level of GDP is less than potential. Another reason for not achieving equilibrium is when there is a decrease in aggregate supply.