Aggregate Demand and Aggregate Supply analysis
Aggregate Demand and Aggregate Supply analysis: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
Section 4.3 · Aggregate Demand and Aggregate Supply analysis
9708 section 4.3; AS Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What determines equilibrium in the AD/AS model?
What you will learn
- Define AD and explain its components and determinants
- Distinguish movement along a curve from a shift
- Explain SRAS and LRAS shapes and determinants
- Establish equilibrium and analyse output, price-level and employment effects
Core model and terms
Aggregate demand is planned spending on domestic output: AD = C + I + G + (X − M). Its curve slopes downward in the standard model; a change in the price level causes movement along AD, while a change in confidence, interest rates, fiscal policy or external demand can shift it. Aggregate supply relates the price level to firms’ output; SRAS slopes upward or may be drawn as a sweeping curve, while LRAS may be vertical or shown in three capacity-dependent sections.
Apply and evaluate
Costs, productivity, technology, resource availability and expectations can shift supply; capacity and time horizon matter. Equilibrium is where AD intersects AS. Trace a shift to the new intersection, then state implications for real output, the price level and employment. With spare capacity, an AD rise may increase output more; near capacity, price pressure can be greater. A productivity improvement can raise capacity and shift LRAS.
Pause and explain
Which statement best applies aggregate demand and aggregate supply analysis?
Worked example
Consumption is $420bn, investment $110bn, government spending $160bn, exports $90bn and imports $120bn. Calculate AD and explain the imports term.
Show the worked solution
- AD = C + I + G + (X − M)
- 420 + 110 + 160 + (90 − 120)
- AD = $660bn; imports are subtracted because they are spending on foreign output
Answer AD = C + I + G + (X − M) → 420 + 110 + 160 + (90 − 120) → AD = $660bn; imports are subtracted because they are spending on foreign output
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Consumption is $420bn, investment $110bn, government spending $160bn, exports $90bn and imports $120bn. Calculate AD and explain the imports term.
Give me a hint
Use the full equation and subtract imports once.
Compare my reasoning
- AD = C + I + G + (X − M)
- 420 + 110 + 160 + (90 − 120)
- AD = $660bn; imports are subtracted because they are spending on foreign output
AD = C + I + G + (X − M) 420 + 110 + 160 + (90 − 120) AD = $660bn; imports are subtracted because they are spending on foreign output
Look for these in your work
- AD = C + I + G + (X − M)
- 420 + 110 + 160 + (90 − 120)
- AD = $660bn; imports are subtracted because they are spending on foreign output
Consumer confidence rises while the price level is unchanged. Show the likely AD change and explain the curve distinction.
Give me a hint
Confidence is a non-price determinant of consumption.
Compare my reasoning
- Higher confidence can raise consumption
- AD shifts right at each price level
- This is a shift, not movement along AD
Higher confidence can raise consumption AD shifts right at each price level This is a shift, not movement along AD
Look for these in your work
- Higher confidence can raise consumption
- AD shifts right at each price level
- This is a shift, not movement along AD
A rise in the general price level reduces real output demanded. Is this an AD shift? Explain.
Give me a hint
Separate the curve’s vertical-axis variable from its determinants.
Compare my reasoning
- The price level changed
- Planned real output demanded changes along the existing AD curve
- A shift requires a non-price determinant
The price level changed Planned real output demanded changes along the existing AD curve A shift requires a non-price determinant
Look for these in your work
- The price level changed
- Planned real output demanded changes along the existing AD curve
- A shift requires a non-price determinant
A technology improvement lowers unit costs and raises productive capacity. Trace likely SRAS and LRAS effects, then qualify the outcome.
Give me a hint
Separate immediate cost effects from longer-run capacity effects.
Compare my reasoning
- Lower unit costs can shift SRAS right
- Higher productive capacity can shift LRAS right
- Equilibrium output may rise and price pressure ease, depending on demand and adjustment
Lower unit costs can shift SRAS right Higher productive capacity can shift LRAS right Equilibrium output may rise and price pressure ease, depending on demand and adjustment
Look for these in your work
- Lower unit costs can shift SRAS right
- Higher productive capacity can shift LRAS right
- Equilibrium output may rise and price pressure ease, depending on demand and adjustment
Common mistakes
- Confusing a price-level movement along a curve with a shift, or predicting the same output and price effects regardless of spare capacity.
What can you explain now?
What determines equilibrium in the AD/AS model?
Compare with the explanation
The intersection of aggregate demand and aggregate supply
At the intersection, planned aggregate demand equals the output firms supply at that price level.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
Before moving on, explain the central idea in aggregate demand and aggregate supply analysis and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.