IBonomicsClassical AD–SRAS–LRAS Diagram – Long-Run EquilibriumSL
MacroeconomicsA diagram showing the Classical model of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS), used to explain long-run macroeconomic equilibrium.
Curves and elements
- ad
- AD: Aggregate Demand, downward sloping due to the wealth effect, interest rate effect, and net exports effect.
- sras
- SRAS: Short-run Aggregate Supply, upward sloping as firms increase output with higher prices.
- lras
- LRAS: Long-run Aggregate Supply, vertical at full employment output, showing price level has no effect on long-run output.
- pl
- PL1: The long-run equilibrium price level where AD intersects SRAS and LRAS.
- y
- Y1: Full employment level of output, also the long-run equilibrium level of real GDP.
Key explanations
- 1
In the Classical model, the long-run aggregate supply (LRAS) is vertical at the full employment level of output, Y1.
- 2
Aggregate demand (AD) slopes downward, showing the inverse relationship between price level and real GDP demanded.
- 3
Short-run aggregate supply (SRAS) slopes upward, indicating that firms increase output as prices rise in the short run.
- 4
The intersection of AD, SRAS, and LRAS represents long-run macroeconomic equilibrium, where actual output equals potential output.
- 5
This model is used to illustrate the effects of demand-side and supply-side policies in bringing the economy back to full employment in the long run.
Example exam question
Using a Classical AD–AS model, explain how an increase in aggregate demand affects real GDP and price level in the short run and long run.
Show example answer
In the short run, an increase in AD shifts the curve to the right, raising both real GDP and the price level. However, in the long run, SRAS shifts left due to rising costs, returning the economy to the full employment level (Y1) at a higher price level, as LRAS is vertical and does not shift unless productive capacity changes.
