Using the Aggregate Expenditure (AE) model, explain in words and using a graph the convergence to equilibrium if the value of GDP real is LOWER than the level of AE generated.

To answer this question you can follow these steps/

1- Draw the AE curve along with the 45 degree line. Label the axes and the curves.

2- Show the equilibrium on the graph and explain how do we identify this equilibrium.

3- Assume the GDP real is LOWER than the AE. Show that on the graph and describe in words the sequence of events that makes the economy to return to equilibrium. You need to stress the role of inventories and production in driving the convergence to equilibrium.