1) Equilibrium output is where the Aggregate Supply (AS) and Aggregate Demand (AD) curves

intersect.If output is below this equilibrium, there's upward pressure on prices, and output
increases.If output is above this equilibrium, there's downward pressure on prices, and output
decreases.Equilibrium price level is set at the intersection of AS and AD.Changes in output
affect prices: below equilibrium, prices rise; above equilibrium, prices fall.

In the long run, the economy tends to operate at its potential output. Potential output is
determined by factors like technology, labor, and capital.Output is not fixed but aligns with the
economy's productive capacity in the long run.If Aggregate Demand remains fixed in the long
run: Prices may still change due to shifts in costs, wages, or other nominal factors , Real output
(actual production) tends to stabilize at the economy's potential level , Inflation or deflation could
occur based on changes in nominal variables.

In summary, in the long run, the economy aims for its potential output, and changes in prices
primarily reflect shifts in nominal factors when Aggregate Demand is fixed. Real output,
however, is determined by the economy's productive capacity.

2) The output gap in this hypothetical economy is $36 billion, calculated as the difference
between the potential (full-employment) output of $156 billion and the actual output of $120
billion. A positive output gap suggests that the economy is operating below its full-employment
capacity, indicating unused resources.

Given the output gap, it is expected that the unemployment level would be higher than usual.
This is because the economy is producing below its potential, implying that there are likely
unemployed or underemployed resources, including labor. Policymakers may consider
implementing measures to stimulate economic activity and close the output gap, aiming to bring
the economy closer to its full-employment potential and reduce unemployment.

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The output gap of $36 billion indicates that the economy is operating below its full-employment
potential, likely due to factors such as economic downturn, reduced aggregate demand,
supply-side constraints, or high unemployment.