IBonomicsAD–AS Diagram – Short-Run Macroeconomic EquilibriumSL
MacroeconomicsThis diagram shows the intersection of the aggregate demand (AD) and short-run aggregate supply (AS) curves to determine the equilibrium price level and real GDP.
Curves and elements
- ad
- AD: Aggregate Demand, slopes downward due to the wealth effect, interest rate effect, and net export effect.
- as
- AS: Aggregate Supply in the short run, slopes upward as higher prices encourage greater output.
- pl
- PL1: The equilibrium price level where AD intersects AS.
- y
- Y1: The equilibrium real GDP/output level where AD equals AS.
Key explanations
- 1
Aggregate demand (AD) represents total demand for goods and services in an economy at different price levels.
- 2
Aggregate supply (AS) in the short run shows the total quantity of goods and services firms are willing to produce at different price levels.
- 3
The intersection of AD and AS determines the macroeconomic equilibrium, with equilibrium price level PL1 and output Y1.
- 4
Any shift in AD or AS can cause inflationary or deflationary pressure and impact real GDP.
- 5
This model is used to analyze the effects of demand-side or supply-side shocks, as well as the role of fiscal and monetary policy.
Example exam question
Using an AD–AS diagram, explain how an increase in government spending affects the price level and real GDP in the short run.
Show example answer
An increase in government spending shifts the AD curve to the right. This leads to a higher equilibrium price level and increased real GDP in the short run, as the new intersection with the AS curve determines a new macroeconomic equilibrium.
