Every macro paper starts here. This page covers aggregate demand and aggregate supply (A Level Economics, all boards): what sits inside AD, why the AD curve slopes down, the difference between short-run and long-run aggregate supply, the classical and Keynesian shapes, and how to shift the curves and read off the new price level and real output. Three diagrams are generated from the same numbers as the worked example. Three exam-style questions follow, with the answers derived, not guessed.
Spec map: where AD and AS sit on your board
| Board | Where it sits | Papers that test it |
|---|---|---|
| AQA 7136 | 4.2.2.2 AD/AS analysis, 4.2.2.3 the determinants of AD, 4.2.2.4 AD and the level of economic activity, 4.2.2.5 determinants of SRAS, 4.2.2.6 determinants of LRAS | Paper 2, Paper 3 |
| Edexcel 9EC0 | Theme 2: 2.2.1 to 2.2.5 (AD and its components), 2.3.1 to 2.3.3 (AS, with Keynesian and classical LRAS), 2.4.3 (equilibrium real national output) | Paper 2, Paper 3 |
| OCR H460 | Component 02, section 1: 1.2 aggregate demand, 1.3 aggregate supply, 1.4 the interaction of AD and AS, 1.5 output gaps | Component 02, Component 03 |
| Cambridge International 9708 | AS Level 4.3 (AD/AS analysis), used again for policy in 5.2.7 and 5.3.4 | Papers 1 and 2 |
Sources: the AQA specification v1.3, Edexcel Issue 2, OCR v3.0 and the Cambridge 9708 syllabus for 2026-2028, all read in September 2026.
What you must be able to do
- Define aggregate demand and write out its four components: C + I + G + (X − M).
- Explain why the AD curve slopes downwards, with the three effects the mark scheme wants.
- Draw the AD/AS diagram with the right axis labels: price level and real GDP, not price and quantity.
- Distinguish short-run aggregate supply from long-run aggregate supply, and the classical shape from the Keynesian one.
- Shift the right curve for a given cause and read off the new price level and output.
- Identify a negative or positive output gap on the diagram and measure it.
- Link the result to the macro objectives: growth, inflation, unemployment and the current account.
Aggregate demand: the four components
Aggregate demand is total planned spending on an economy’s output at a given price level. Four groups do the spending. Consumption is by far the largest in the UK.
| Component | What it is | What moves it | An exam example |
|---|---|---|---|
| C, consumption | Household spending on goods and services | Disposable income, interest rates, consumer confidence, house prices and other wealth, the availability of credit | Bank Rate cut, mortgage payments fall, C rises |
| I, investment | Firms buying capital goods: machines, buildings, software | Interest rates, business confidence, the rate of growth, access to credit, corporation tax, expected demand for exports | A firm delays a new factory because borrowing costs have doubled |
| G, government spending | Spending on public services and public investment, not transfers such as pensions | Fiscal policy choices, the stage of the trade cycle | A new hospital-building programme |
| X − M, net trade | Exports minus imports | The exchange rate, incomes at home and abroad, the state of the world economy, protectionism, non-price competitiveness | The pound falls, UK exports get cheaper abroad, X rises |
The AD curve slopes downwards because a higher price level cuts spending in three ways. Real balances fall, so wealth buys less. Higher prices tend to bring higher interest rates, which cut C and I. And UK goods become dearer than foreign ones, so X falls and M rises. Two of the three are enough for most 4-mark questions. Name them.
Drawing the AD/AS diagram
Put the price level on the vertical axis and real GDP, or real national output, on the horizontal. AD slopes down. Short-run aggregate supply slopes up, because in the short run firms can sell more at higher prices while wages and other costs are fixed. Long-run aggregate supply, in the classical version, is a vertical line at full-employment output. In the long run the economy produces what its resources and technology allow, whatever the price level.
Equilibrium is where AD crosses SRAS. If that point also sits on LRAS, the economy is in long-run equilibrium. If it sits to the left of LRAS, there is a negative output gap and unemployment above the natural rate. To the right, a positive gap and inflationary pressure. That is the whole diagram. Every macro policy question is a variation on it.
Mark scheme: The 4 diagram marks go for four things. Both axes labelled “Price level” and “Real GDP” or “Real national output”. Every curve named: AD, SRAS, LRAS. The equilibrium marked, with dashed lines to the price level and the output on the axes. And, if there is a shift, the arrow and the numbering: AD₁ to AD₂.
Common mistake: Labelling the axes “Price” and “Quantity”. That is a micro diagram. The examiner may credit nothing else on the diagram once the axes say it is a market for one good.
The Keynesian AS curve: spare capacity and the output gap
Keynes drew aggregate supply differently, and every board expects you to know both shapes. His curve is flat when the economy has lots of spare capacity, because firms can hire idle workers and machines without bidding up wages. It bends upwards as bottlenecks appear. It becomes vertical at full employment. There is no separate SRAS and LRAS. One curve does both jobs.
The shape changes the answer to every policy question, which is why examiners like it.
| Classical | Keynesian | |
|---|---|---|
| Shape of long-run AS | Vertical at full-employment output | Flat with spare capacity, curving up, vertical at full employment |
| Can the economy sit below full employment in the long run? | No. Wages and prices adjust and it returns to Yfe | Yes. Wages are sticky downwards, so a recession can last |
| A rise in AD with spare capacity | Raises the price level only, once the short run has passed | Raises output with little or no rise in prices |
| A rise in AD near full employment | Inflation | Inflation, the same as classical |
| Policy conclusion | Supply-side policy grows the economy; demand management just moves prices | Demand management works in a recession; supply-side policy matters near full employment |
| Where the boards name it | AQA 4.2.2.6, Edexcel 2.3.3, OCR Component 02 2.8 | Same sections |
Exam tip: Use the Keynesian curve whenever the question says “spare capacity”, “recession”, “negative output gap” or “why did the stimulus not cause inflation”. Use the classical curve for anything about the long run, growth or supply-side policy. If the question gives no steer, draw the classical diagram and say in words what would change on the Keynesian one. That sentence is evaluation.
Shifting the curves: what moves AD, SRAS and LRAS
A change in the price level moves you along AD. Anything else that changes spending shifts it. The same rule holds for AS: a change in the price level is a movement, a change in costs or capacity is a shift.
| Curve | Shifts right when | Shifts left when | Effect of a rightward shift |
|---|---|---|---|
| AD | Interest rates fall, taxes fall, government spending rises, confidence rises, the pound falls, world growth picks up | The opposite of each: a rate rise, a tax rise, an austerity budget, a confidence shock, a stronger pound | Real GDP up, price level up, unemployment down. Demand-pull inflation near full employment |
| SRAS | Energy, raw-material or wage costs fall; indirect taxes fall; the pound strengthens, so imported inputs get cheaper | Costs rise: an oil-price shock, a wage surge, a weaker pound, a VAT rise | Real GDP up, price level down. A leftward shift gives cost-push inflation and lower output at once |
| LRAS | More or better labour, capital or technology; higher productivity; net migration; supply-side reforms that work | A shrinking workforce, a capital stock wearing out, productivity falling | Higher potential output, a lower price level, room for AD to grow without inflation |
Common mistake: Writing “the economy grows” for a movement along AD. Growth is a rightward shift of LRAS, or a rise in real GDP after a shift of AD. A movement along a curve is caused by the price level and nothing else.
Worked example — closing a negative output gap with a spending boost
Treat the numbers as an index. Real GDP of 100 is full employment. The price level is an index too, so 120 means prices are 20% above the base year.
- Aggregate demand is P = 200 − Y. Short-run aggregate supply is P = 40 + Y. Long-run aggregate supply is vertical at Y = 100.
- Equilibrium: 200 − Y = 40 + Y, so 2Y = 160 and Y = 80. The price level is 200 − 80 = 120. Call this E₁.
- The output gap is 100 − 80 = 20, a negative gap of 20% of full-employment output. Unemployment is above the natural rate.
- The government announces extra spending. AD shifts right by 20 at every price level: P = 220 − Y.
- New equilibrium: 220 − Y = 40 + Y, so Y = 90 and P = 130. Call this E₂.
- Read the result off the diagram. Output rose by 10, half the size of the shift. The price level rose by 10 too. The gap is now 10, narrower but not closed.
- Interpret it. On an upward-sloping SRAS, some of the boost leaks into prices: demand-pull inflation. On a flat Keynesian AS, all 20 would have gone into output and none into prices. Which curve applies is the evaluation the examiner is waiting for.
Exam-style questions
Q1: Using the figures in the worked example, calculate the size of the negative output gap at E₁ as a percentage of full-employment output. (2 marks)
A: Gap = 100 − 80 = 20 (1). As a percentage of 100 that is 20% (1). State the sign: negative, because actual output is below potential.
Q2: Suppose instead that AD shifts to P = 240 − Y. Calculate the new equilibrium and explain what has happened to the output gap. (4 marks)
A: 240 − Y = 40 + Y, so Y = 100 and P = 140 (2). Output now equals full-employment output, so the gap is closed exactly (1). The shift needed was 40, twice the size of the gap, because SRAS slopes up as steeply as AD slopes down, so half of every shift goes into the price level (1).
Q3: A rise in world energy prices raises firms’ costs, so SRAS becomes P = 60 + Y while AD stays at P = 200 − Y. Calculate the new equilibrium and, with the aid of a diagram, explain the effect on two macroeconomic objectives. (8 marks)
A: Show the knowledge, run the analysis through AD/AS, then evaluate.
- Knowledge and application: 200 − Y = 60 + Y, so Y = 70 and P = 130. The diagram shows SRAS₁ shifting left to SRAS₂ along a fixed AD, with the equilibrium moving up and to the left.
- Analysis: output has fallen from 80 to 70, so the negative gap has widened from 20 to 30 and unemployment rises. The price level has risen from 120 to 130, so inflation rises at the same time. Both objectives worsen at once: this is cost-push inflation, or stagflation.
- Evaluation: the size of both effects depends on the slope of SRAS. If the economy were on the flat part of a Keynesian AS the price rise would be smaller. A central bank cannot fix both problems with one tool: raising Bank Rate to cut inflation would widen the output gap further.
Examiner’s checklist: the mistakes that lose AD/AS marks
- Micro axes on a macro diagram. “Price” and “Quantity” instead of “Price level” and “Real GDP”.
- The wrong direction. In June 2023 an Edexcel 4-mark “draw” question was answered with AS shifting right when the stem described a fall. One mark out of four, for the labels.
- No numbering on the shift. AD₁ to AD₂ with an arrow, or the examiner cannot see which way you went.
- Movement described as a shift. A price-level change moves along the curve. Only a change in a component of AD shifts it.
- The wrong AS for the question. Spare capacity means the Keynesian curve. Long run and growth mean the classical one.
- Objectives left out. OCR’s reports say “effect on the economy” needs the macro objectives named. Pick two and say which way each moves.
Key takeaways
- AD = C + I + G + (X − M). Consumption is the biggest component, and interest rates touch three of the four.
- AD slopes down for three reasons: the wealth effect, the interest-rate effect and the trade effect.
- SRAS slopes up because costs are fixed in the short run. Classical LRAS is vertical at full employment. Keynesian AS is flat, then steep, then vertical.
- Price-level changes move along a curve. Everything else shifts one.
- Every policy question is “which curve shifts, which way, and where does the new equilibrium land”.
FAQ
Q: Which macroeconomics diagrams do I need for A Level?
A: Six cover almost every macro question: AD/AS with a classical LRAS, the Keynesian AS, a shift in AD, a shift in LRAS, the Phillips curve and the PPF. All six are on the A Level economics diagrams page.
Q: How do I draw an AD AS diagram in the exam?
A: Axes first: price level up, real GDP across. Then LRAS as a vertical line, AD sloping down, SRAS sloping up through the equilibrium you want. Mark E, project dashed lines to both axes, label everything. Under a minute after ten practices.
Q: What should A Level macroeconomics revision start with?
A: This diagram. Every other macro topic, from monetary policy to supply-side policies, is a shift on it. The revision hub has the full order.
Q: Why does the AD curve slope downwards?
A: A higher price level cuts real wealth, tends to raise interest rates and makes exports dearer than imports. All three reduce total spending. Any two, explained, earn the marks.
Q: What is the difference between SRAS and LRAS?
A: SRAS holds costs fixed, so firms supply more at higher prices and the curve slopes up. LRAS lets all costs adjust, so output depends on resources and productivity, and the classical curve is vertical.
Q: What is an output gap and how do I show it?
A: The gap between actual real GDP and full-employment real GDP. On the diagram it is the horizontal distance between the equilibrium and the LRAS line. Negative to the left, positive to the right. Say the sign and the size.
Turn the diagram into marks
If AD/AS still feels like memorising four curves, one lesson fixes that. Say which board you sit and when your macro paper is; I reply within a day with a lesson time. The format and the hourly rate are set out on the A Level economics tutor page.
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