What this lesson teaches
I can use AD and AS to find the equilibrium national output and general price level.
Syllabus 8843, 3.1.1(d). Aggregate Demand and Aggregate Supply: How interaction of AD and AS determines equilibrium level of national output and general price level
Make a guess
Exports recover just as imported energy becomes more expensive. Which outcome is most certain?
- Neither changes, because the shocks cancel out.
- Real output rises.
- The price level rises.
Show the answer
The price level rises.
Stronger exports shift AD right and dearer energy shifts SRAS up. Both push prices up; output depends on which shock is bigger.
A good AD/AS answer links evidence to the right curve, then says what the result depends on.
Start with the evidence: what has changed? Then decide whether it affects AD (spending), AS (costs or capacity), or both.
Trace the shift and its effect on real output and the price level.
Then say what the size of the effect depends on: where the economy is on AS, the size of the multiplier, how long the shock lasts, and whether other things are changing at the same time.
When two shocks happen together, only one outcome may be certain. Say which, and explain why the other depends on the sizes of the shocks.
- Method
- Evidence, curve, shift, effect, then what it depends on.
- Two shocks
- Only one outcome may be certain.
Worked example: Exports recover while energy costs rise
A report says Singapore's exports are recovering, but imported energy is getting more expensive. New machinery is arriving, but will take six months to become productive.
- Recovering exports: AD shifts right.
- Dearer energy: SRAS shifts up.
- Both push the price level up, so it is likely to rise. The effect on output depends on which shock is bigger.
- In six months, the new machinery raises productive capacity, shifting AS right and easing price pressure.
Watch out for this
An AD/AS diagram tells you exactly how much output and prices will change.
The diagram shows the direction of changes. Their size depends on evidence about the shocks and the economy.
Check your understanding
In 2020, both foreign demand and supply chains were disrupted. Which outcome is most certain?
- Real output falls.
- The price level rises.
- Both output and prices rise.
Show the answer
Real output falls.
Right. A fall in AD and an adverse supply shock both reduce output.