Final answer:
Short-run equilibrium is reached when the aggregate demand curve intersects with the short-run aggregate supply curve, reflecting the equilibrium GDP and price level. A vertical AS curve means an economy at full employment, and changes in AD would impact prices, not output.
Step-by-step explanation:
Equilibrium is achieved in the short-run when the aggregate demand (AD) curve intersects with the short-run aggregate supply (AS) curve. This intersection point indicates the equilibrium level of real GDP and the equilibrium price level in the economy. When the aggregate supply curve is upward sloping in the short run, it reflects variable degrees of pricing power, wage rates, and returns to other factors of production. In contrast, the vertical aggregate supply curve depicts an economy at full employment where output is fixed, and no additional output can be produced with the existing resources.
In the scenario where the AD curve intersects with the vertical AS curve, it would suggest that the economy is at full employment—any increases in aggregate demand would only lead to higher prices without an increase in output. Insufficient aggregate demand can lead to an equilibrium that is below the economy's potential output. Factors such as a decrease in aggregate supply, due to a leftward shift of the AS curve, could also cause the equilibrium to occur at a level of GDP that is less than the potential GDP.