AP MacroeconomicsUnit 3: National Income and Price Determination · 17–27% of the exam

3.5 Equilibrium in the Aggregate Demand–Aggregate Supply (AD–AS) Model

Short-run equilibrium is where AD crosses SRAS; if that output sits below LRAS the economy has a recessionary gap, and above it an inflationary gap.

Short-run macroeconomic equilibrium is the intersection of AD and SRAS, it fixes the current price level and real GDP. Long-run equilibrium requires all three curves (AD, SRAS, LRAS) to intersect at the same point, meaning the economy is producing exactly its full-employment output.

Compare short-run equilibrium output to LRAS to name the gap: output below full employment is a recessionary (negative output) gap, with unemployment above the natural rate; output above full employment is an inflationary (positive output) gap, with unemployment below the natural rate and upward pressure on prices.

FRQ graphs here are graded on labels: axes as 'price level' and 'real GDP,' all three curves named, and equilibrium marked with dashed lines to both axes. Show current output and full-employment output as separate points on the horizontal axis when a gap exists.

Key terms for 3.5

AD-AS Model Aggregate Demand Short-Run Aggregate Supply Long-Run Aggregate Supply Recessionary Gap Inflationary Gap Output Gap Full Employment

See 3.5 in action

Drag the curves above, or open the full AD/AS Model sandbox. Then draw it yourself for a graded check or watch the step-by-step walkthrough. Teaching this? Put this graph on your own class page, free.

Common mistake

Marking equilibrium output and full-employment output at the same spot when the question describes a gap. If output is below (or above) potential, current equilibrium must sit visibly left (or right) of LRAS on the horizontal axis.

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3.4 Long-Run Aggregate Supply (LRAS)

3.6 Short-Run Changes in AD-AS

Learn this properly, then test yourself

Aggregate Demand & Supply

Full lesson 15 practice questions

Aggregate Supply

Full lesson 22 practice questions

Fiscal Policy

Full lesson 39 practice questions

Teaching this topic?

A full lesson plan for 3.5, with timings, a warm-up, guided practice and an exit ticket.

Aggregate Demand: Components, the Three Effects, and the Multipliers (2 periods)Aggregate Supply: SRAS, Vertical LRAS, and Self-Correction (2 periods)

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