AD-AS Model graph mistakes

20 ways students lose points on this diagram, each taken from a worked free-response scenario. Every entry names the reasoning that causes the error, not just the error, because the wrong answer is usually a sensible thought applied to the wrong curve.

1. 01

   Expansionary Fiscal Policy

   The mistake. Many students also shift LRAS right, reasoning that government spending on roads and buildings adds to the nation's capacity. LRAS moves only when the quantity of resources or the level of technology changes, and a one-year increase in purchases changes neither, so the extra output here is a temporary gap above potential rather than a higher potential.

   Draw this instead. AD shifts right.

   Exam tip. If the stimulus is a change in C, I, G, or Xn, move AD alone and then read the new price level and output off the AD-SRAS intersection, not off LRAS.

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2. 02

   Consumer Confidence Shock

   The mistake. Students commonly add a leftward SRAS shift because they associate a downturn with struggling firms. Firms do produce less, but that is a movement along an unchanged SRAS caused by weaker spending; nothing has changed what it costs a firm to make one unit of output.

   Draw this instead. AD shifts left.

   Exam tip. Sort the shock by who acted. Households changed their spending plans, so the answer is an AD shift, and the fall in output is a recessionary gap measured horizontally from the new equilibrium to LRAS.

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3. 03

   Oil Price Shock

   The mistake. Many students shift AD left instead, reasoning that expensive fuel leaves households with less to spend. The shock enters through firms' per-unit costs, not through spending plans, and the AD answer predicts a falling price level, which is the opposite of the inflation the scenario actually produces.

   Draw this instead. SRAS shifts left.

   Exam tip. Stagflation is the fingerprint of a leftward SRAS shift. If your drawing has the price level and real GDP moving in the same direction, you shifted a demand curve when the stem described a cost shock.

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4. 04

   Cheaper Inputs

   The mistake. A frequent wrong answer is shifting AD right, on the logic that cheaper goods let consumers buy more. Consumers do buy more, but that is a movement along an unchanged AD in response to the lower price level, and a shift of AD would push the price level up rather than down.

   Draw this instead. SRAS shifts right.

   Exam tip. A change in input prices always moves SRAS, and the price-level change it causes is a movement along AD, never a shift of AD.

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5. 05

   Long-Run Growth

   The mistake. Students often move SRAS right instead of LRAS, because better technology does lower costs. This prompt asks only for the change in productive capacity, and capacity on the AP graph is the vertical LRAS line, so an SRAS answer is answering a different question than the one asked.

   Draw this instead. LRAS shifts right.

   Exam tip. Only four things move LRAS: more or better labor, more capital, more natural resources, and better technology. If the event is not one of those four, LRAS does not move.

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6. 06

   Stock Market Boom

   The mistake. A common error is shifting an aggregate supply curve right because rising share prices sound like firms are thriving. A share price is neither a cost of production nor a resource the economy owns, so it touches neither SRAS nor LRAS; the channel is household wealth raising consumption.

   Draw this instead. AD shifts right.

   Exam tip. Wealth is a determinant of consumption, so trace it to C, shift AD, and then label the horizontal distance from the new equilibrium out to LRAS as the inflationary gap.

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7. 07

   Household Income Tax Cut

   The mistake. Many students shift SRAS right, having learned that lower taxes lower costs. That rule applies to per-unit taxes levied on firms' output; a personal income tax is paid by households, so it works through disposable income and consumption and therefore moves AD.

   Draw this instead. AD shifts right.

   Exam tip. Ask who writes the check. A tax on households moves AD through C, while a per-unit tax or subsidy on firms moves SRAS through per-unit cost.

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8. 08

   Austerity Spending Cut

   The mistake. Students sometimes shift LRAS left, arguing that a smaller government means a smaller economy. Potential output depends on the resources and technology available, which austerity does not destroy, so the fall in real GDP is a short-run gap below an LRAS that has not moved.

   Draw this instead. AD shifts left.

   Exam tip. After a leftward AD shift, place the new equilibrium to the left of LRAS and label that horizontal distance as the recessionary gap, since the rubric usually awards a separate point for identifying the gap.

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9. 09

   Economy-Wide Wage Hike

   The mistake. Students often shift AD right instead, reasoning that better-paid workers have more to spend. In the AP model an economy-wide nominal wage increase with unchanged productivity is a cost shock, and the AD answer predicts real GDP rising when the model says it falls.

   Draw this instead. SRAS shifts left.

   Exam tip. Nominal wages are the most heavily tested SRAS determinant, so commit the pairing to memory: wages up with productivity unchanged means SRAS left, every time.

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10. 10

    Immigration and Capacity

    The mistake. Students frequently shift AD right instead, since more people means more consumers. The prompt asks specifically about productive capacity, and a permanently larger labor force is an increase in the economy's resources, which is recorded only by LRAS.

    Draw this instead. LRAS shifts right.

    Exam tip. Read the time frame before you draw. Words like permanently or over the past decade signal a capacity question and therefore LRAS, while this year or in the short run signal AD or SRAS.

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11. 11

    Earthquake Destroys Capital

    The mistake. Almost every student reaches for SRAS here, because a disaster sounds like it should raise costs. The prompt asks what the economy is now capable of producing, and capital that is permanently gone is a lost resource, which only LRAS records; an SRAS-only answer quietly claims the damage is temporary and that potential output is untouched.

    Draw this instead. LRAS shifts left.

    Exam tip. Put every disaster stem through one test: is the lost resource coming back? Permanent losses of labor, capital, or natural resources move LRAS, while temporary disruptions that leave the resources intact move SRAS.

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12. 12

    Recession Among Trading Partners

    The mistake. Many students shift SRAS left, picturing exporters cutting back production lines. Exporters do produce less, but that is a movement along an unchanged SRAS driven by weaker spending, and nothing in the stem changed what it costs an Ardennian firm to produce a unit.

    Draw this instead. AD shifts left.

    Exam tip. Route every international event through C plus I plus G plus Xn first. Fewer exports means a smaller Xn, and any change in a spending component is an AD shift, never a supply shift.

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13. 13

    Central Bank Tightening

    The mistake. A frequent error is shifting SRAS left because higher interest rates feel like a cost to firms. In the AP model interest on borrowing is not part of the per-unit cost of producing output; monetary policy reaches the economy through interest-sensitive spending, so it lands on AD.

    Draw this instead. AD shifts left.

    Exam tip. Both monetary and fiscal policy act on AD in this model, so reserve SRAS for events that change the cost of producing one unit: wages, input prices, productivity, and per-unit business taxes or subsidies.

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14. 14

    Costly Rules Repealed

    The mistake. Students often shift AD right instead, on the general sense that deregulation is good for the economy. Nobody's spending plans changed here; what changed is the cost of producing a unit, and an AD answer would push the price level up when this event pushes it down.

    Draw this instead. SRAS shifts right.

    Exam tip. When a policy lands on firms' cost of production rather than on anyone's spending, it is an SRAS event, and the tell is that the price level and real GDP finish moving in opposite directions.

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15. 15

    Freight Rail Strike

    The mistake. The usual wrong answer is a leftward LRAS shift, on the reasoning that the country simply cannot produce as much right now. The rail network is idled by a strike, not destroyed, and potential output depends on the resources and technology the economy owns, every one of which is still there the day the strike ends.

    Draw this instead. SRAS shifts left.

    Exam tip. Ask whether the disruption is reversible. Strikes, blocked lanes, and temporary shortages raise the cost of producing a unit and sit on SRAS, while permanently lost resources sit on LRAS, and the stem always tells you which.

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16. 16

    Factory Construction Boom

    The mistake. The tempting error is to shift LRAS right at the same time, since the economy is adding factories. Capital raises potential output only once it is finished and producing, and the stem places that several years away, so in the current year the event is pure spending and only AD moves.

    Draw this instead. AD shifts right.

    Exam tip. Investment appears twice in macro, as spending today that shifts AD and as capital tomorrow that shifts LRAS, so let the time frame in the stem decide which one the question is asking about.

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17. 17

    Tax Cut and Cheap Inputs

    The mistake. The most common error is reporting both outcomes as determinate, almost always as "real GDP rises and the price level rises" because the tax cut is the more familiar shock and students stop reading there. Both shifts do raise output, but they move the price level opposite ways and the stem never says which shift is bigger, so any signed claim about the price level is a guess. A second frequent error is shifting LRAS right for the tax cut, when a change in disposable income alters no resource and no technology.

    Draw this instead. AD shifts right and SRAS shifts right.

    Exam tip. On any combined shift, draw both new curves and then test the two outcome variables separately: if the shifts push a variable the same way, state a direction, and if they push it opposite ways, write the word indeterminate and say it depends on the relative sizes of the shifts.

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18. 18

    Austerity and Wage Hike

    The mistake. Most wrong answers sign both outcomes, usually as "real GDP falls and the price level falls", treating the spending cut as the whole story and forgetting that the wage shock pushes prices the other way. The mirror-image error, calling this stagflation with a definitely higher price level, is equally unsupported. Only output is pinned down here, and a student who writes a specific price-level direction has claimed to know a magnitude the stem never gave.

    Draw this instead. AD shifts left and SRAS shifts left.

    Exam tip. When both curves shift the same way along the horizontal axis, the output answer is the safe point and the price level is the trap, so write "indeterminate" for it instead of reading a direction off whichever shift you happened to draw bigger.

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19. 19

    Spending Program and Oil Shock

    The mistake. Students typically answer "the price level rises and real GDP rises" because they lead with the fiscal expansion, or they answer stagflation with output definitely falling because they lead with the oil shock. Both output claims are guesses. The spending increase and the cost increase push real GDP opposite ways, so only the price level can be signed, and picking a winner between the two shocks requires magnitudes the stem never supplies.

    Draw this instead. AD shifts right and SRAS shifts left.

    Exam tip. When AD and SRAS shift in opposite directions, the price level is the determinate outcome and output is not, so earn the point by writing that real GDP is indeterminate and naming the relative size of the two shifts as the reason.

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20. 20

    Export Slump and Deregulation

    The mistake. The usual wrong answer signs both outcomes, most often as "the price level falls and real GDP falls", because a recession abroad sounds like the dominant event. Nothing in the stem ranks the two shifts, and the cost relief pushes output the other way, so output cannot be signed. A second common error is shifting LRAS right for the deregulation, but removing per-unit paperwork costs is a cost change, not an increase in the economy's resources or technology.

    Draw this instead. AD shifts left and SRAS shifts right.

    Exam tip. Scan the stem for two independent shocks before you draw anything, and when one hits spending while the other hits per-unit costs, expect exactly one determinate outcome and state in words which variable you cannot sign.

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