Final answer:
Real GDP is the value of aggregate output at any given time, whereas full-employment GDP or potential GDP represents the maximum sustainable output when the economy is at full employment. The economy's equilibrium occurs at the intersection of aggregate demand and supply at full employment, whereas shifts in aggregate demand can lead to deviations from full employment conditions.
Step-by-step explanation:
Real GDP is not merely defined as the value of aggregate output produced when the economy is operating at full employment. Instead, full-employment GDP is often referred to as potential GDP, which is the maximum output that an economy can produce while maintaining a sustainable level of employment, or the natural rate of unemployment. The original equilibrium of an economy is said to occur at the intersection of the aggregate demand function (AD) and the aggregate supply (AS), where the economy operates at potential GDP, also known as full employment.
When aggregate demand shifts to the left, it typically leads to decreased real GDP without affecting the price level, indicating that the equilibrium has moved away from the full employment output. On the other hand, the expenditure-output model illustrates that equilibrium GDP occurs where aggregate expenditure is equal to output at equilibrium point Eo, with a representation of potential GDP at full employment distinctly marked.