Q. Determination of all the endogenous variables?

Determination of all the endogenous variables in the AS-AD model

Determination of P and Y:

We know that for all points on AD curve, both the money market and goods are in equilibrium.

We also know that firms would always produce an amount consistent with the AS-curve. 

Figure: Determination of P and Y in the AS-AD model

There is only one level for P and for Y that is consistent with equilibrium in both markets and which is consistent with firm behaviour. Price level at this point is the equilibrium price level and GDP level at this point is the equilibrium quantity of GDP. We refer these levels by P* and Y*.

AS-AD model, P will always move towards P* and Y would always move towards Y*. To justify this behaviour of economy, let's consider what will happen if P < P*. 

1. From the graph, we see that in this case Y_S< Y_D. 

2. As we are on the upward sloping part of the AS-curve, aggregate supply won't automatically increase. But as firms can sell everything they produce and since stocks are diminishing, they will raise prices. 

3. When P increases, real wages W/P falls and L increases. With more labor, firms can increase production. 

4. When P increases, demand for money will increase. Then interest rates will increase and Y_D will fall (LM-curve shifts upwards). 

5. Overall, YD falls and Y_S increases when P increases. As long Y_S< Y_D, firms would continue to raise prices. So prices will continue to increase till Y_S = Y_D and economy is in equilibrium.