AD–AS Model draws the aggregate demand and aggregate supply model of the whole economy, the price level against real GDP: a downward-sloping aggregate demand curve (AD), an upward-sloping short-run aggregate supply curve (SRAS), and a vertical long-run aggregate supply curve (LRAS) at full-employment output, or potential GDP. Start in long-run equilibrium or with a recessionary or inflationary gap braced under the axis, then shift AD, SRAS or LRAS: a demand shock, a negative supply shock and stagflation, expansionary or contractionary fiscal and monetary policy closing a gap, the economy self-adjusting in the long run, or economic growth. Aggregate supply can also be drawn in three ranges, flat, then curving up, then vertical at full-employment output, as in the Keynesian model.
Teachers use it for AP Macroeconomics tests, free-response practice, worksheets and slides. Graphs are schematic, with no numbers, the way AP graphs are drawn, with the curves before and after a shift named AD₁ and AD₂, the equilibria E₁ and E₂, and dashed lines to PL₁, PL₂ and Y₁ at the axes; or numbered from a schedule of price levels and real GDP, with a callout giving the equilibrium. Every label can be written, left as a blank line for students to fill in, or left off, in color or black and white.
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What is the difference between a recessionary gap and an inflationary gap?
Both are output gaps: the distance between real GDP at the short-run equilibrium, where AD crosses SRAS, and full-employment output, where LRAS stands. In a recessionary gap real GDP is below full employment and unemployment is above its natural rate; in an inflationary gap real GDP is above full employment, unemployment is below its natural rate, and the price level is pushed up. Choose Recession or Inflation under Starting point, and the size of the gap, and the gap is braced under the real GDP axis and labeled.
How do you show expansionary fiscal policy on an AD–AS graph?
More government spending or lower taxes increase aggregate demand, so AD shifts right and real GDP and the price level both rise; expansionary monetary policy, lowering interest rates, shifts AD right the same way. Start in a recessionary gap and set Aggregate demand (AD) to To Yf under Shifts: AD₁ moves right just far enough to cross SRAS at full employment, with E₁ and E₂, PL₁ and PL₂ marked. Contractionary policy is the same from an inflationary gap, with AD shifting left.
What does a negative supply shock look like on the AD–AS graph?
A rise in the price of a key input, like oil, raises firms’ costs, so short-run aggregate supply decreases and SRAS shifts left. The price level rises while real GDP falls and unemployment rises, the combination called stagflation. Set Short-run aggregate supply (SRAS) to Left under Shifts and choose how far: from long-run equilibrium, the new equilibrium E₂ is up and to the left of LRAS, and the recessionary gap is braced under the axis.
How does the economy self-adjust in the long run?
Without policy, wages and other input prices adjust over time. In a recessionary gap, unemployment above the natural rate pushes nominal wages down, SRAS shifts right, and real GDP returns to full employment at a lower price level; in an inflationary gap, wages rise, SRAS shifts left, and real GDP falls back to full employment at a higher price level. Set Short-run aggregate supply (SRAS) to To Yf under Shifts, and the straight SRAS line moves just far enough to cross AD on LRAS, from either gap.
Why is long-run aggregate supply vertical?
In the long run wages and prices have fully adjusted, so the economy’s output depends on its resources and technology, not on the price level: LRAS is a vertical line at potential, or full-employment, real GDP. Economic growth, from more capital, more labor or better technology, shifts LRAS right. Choose the Economic growth setup, or set Long-run aggregate supply (LRAS) to Right under Shifts with Short-run aggregate supply (SRAS) set to To Yf, so SRAS moves with it to the new full-employment output, and name the line LRAS, Potential GDP or both under Labels.
Can the AD–AS graph have numbers on the axes?
Yes. Graphs start schematic, with no numbers, as AP Macroeconomics draws them. Choose Numbered under Axes, type a schedule of price levels with the real GDP demanded and supplied at each, and potential GDP, and AD and AS are drawn through the rows, with a dot at each. The settings panel gives the equilibrium price level and real GDP and the size of any output gap, and a callout can write the equilibrium on the graph; the axes fit the schedule or can be typed.
How do I make an AD–AS worksheet where students label the graph?
Under Labels, choose Blank lines for Every label, and each curve, the equilibrium, the price level and real GDP at the axes, full-employment output and the gap get a line for students to write on; or set the labels one at a time. The Students label a recessionary gap setup does this for you. Set the axis titles to blank lines under Titles too, and choose Black and white under Look for photocopying.
Econ Figures AD–AS Model