AD/AS Model
Aggregate demand, short-run and long-run aggregate supply, and output gaps.
Think you know when each curve moves? Try the draw-the-graph FRQ drills and get graded on it.
What this graph shows
The aggregate demand and aggregate supply model is the core macroeconomic diagram in AP Macro. It puts the whole economy on one graph: aggregate demand (AD) captures total spending by households, firms, government, and foreigners, while short-run aggregate supply (SRAS) captures total production when input prices are sticky. Long-run aggregate supply (LRAS) is a vertical line at the economy's full-employment level of output.
Equilibrium output relative to the LRAS line is the output gap. To the right of LRAS the economy overheats in an inflationary gap; to the left it runs a recessionary gap. The preset shocks let you fire a government spending increase, a rate hike, a supply chain crisis, or a productivity boom and watch which curve moves and where the economy lands.
How to read it
The horizontal axis is real GDP (total output) and the vertical axis is the price level, not the price of any single good. AD slopes down, SRAS slopes up, and LRAS is the vertical line marking full-employment output. Short-run equilibrium is where AD crosses SRAS, fixing both the price level and real GDP. Compare that quantity to the LRAS line: to the right is an inflationary gap, to the left a recessionary gap, and on the line long-run equilibrium.
Three things to try
- Apply the Supply Chain Crisis shock and watch SRAS shift left. The price level rises while real GDP falls at the same time, the textbook picture of stagflation that a demand shift alone cannot produce.
- Shift AD right until equilibrium passes the LRAS line. The gap readout flips to Inflationary and the price level climbs, showing why demand-driven booms create inflation pressure.
- Apply the Productivity Boom shock to move SRAS right. Real GDP rises and the price level falls together, the one combination that lowers inflation and raises output at once.
Common questions
What is the difference between SRAS and LRAS?
SRAS slopes upward because input prices like wages are sticky in the short run, so higher prices raise production. LRAS is vertical at full-employment output because in the long run wages and input prices fully adjust, so total output depends on resources and technology, not the price level.
What causes an inflationary gap in the AD/AS model?
An inflationary gap happens when short-run equilibrium output lands to the right of the LRAS line, usually after AD shifts right from more spending, investment, or expansionary policy. Output is temporarily above full employment, pushing the price level up until wages rise and SRAS pulls it back.
Does the price level axis measure the price of one good?
No. The vertical axis is the aggregate price level for the whole economy, like the GDP deflator or CPI, not the price of a single product. A rising price level means broad inflation across all goods and services.
AD/AS Model: key terms
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