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A-Level Economics · AD/AS equilibrium diagram question

Now the price level is at P₃ = 3, BELOW equilibrium. What is happening?

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The answer

Excess demand of 4 — buyers want more output than firms will produce, so the price level is bid up. Demanded 7 (L) − supplied 3 (M) = 4. Buyers bid the price level up, firms extend output, and the economy climbs back to E. Below equilibrium: buyers want 7 (point L), firms only produce 3 (point M) — excess demand of 4. That pressure bids the price level up and pulls output along AS until the two plans match again at E.

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This is one of 6 questions on the ad/as equilibrium diagram — every corner lettered, every wrong answer diagnosed.

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