AQA A-Level Economics 2025/6

Economics • A-Level

Question 1 of 114

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[DIAGRAM: AD/AS model showing macroeconomic equilibrium]

With reference to the AD/AS diagram shown, explain the short‑run and long‑run effects on real GDP, the price level and unemployment of the left‑ward shift in aggregate demand. In your answer, identify the type of gap created and discuss what policy measures could be used to restore the economy to its long‑run equilibrium.

Hint: Look at how the AD curve moves and note the distance between the new short‑run equilibrium and the LRAS – this shows the type of output gap.

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Correct answer: The diagram shows an initial macro‑economic equilibrium where AD, SRAS and LRAS intersect at point A, representing full‑employment output (Yₑ) and the natural rate of unemployment. The left‑ward shift of AD to AD₂ reduces aggregate demand, moving the short‑run equilibrium to point B where SRAS intersects the new AD curve. At point B real GDP falls to Y₂ (< Yₑ), the price level falls from P₁ to P₂ and the economy experiences a recessionary (or deflationary) gap because output is below the economy’s potential. Unemployment rises above the natural rate as firms cut production and lay off workers. In the long run, because prices and wages are flexible, SRAS will shift rightwards (or AD may shift back) until the economy returns to the LRAS at a new equilibrium (point C) at the original price level or a lower one, depending on expectations. To close the recessionary gap in the short run, expansionary fiscal policy (increased government spending or tax cuts) or expansionary monetary policy (lowering interest rates, quantitative easing) could shift AD back to the right, restoring output to its potential and reducing unemployment.

Your Answer

Correct Answer

The diagram shows an initial macro‑economic equilibrium where AD, SRAS and LRAS intersect at point A, representing full‑employment output (Yₑ) and the natural rate of unemployment. The left‑ward shift of AD to AD₂ reduces aggregate demand, moving the short‑run equilibrium to point B where SRAS intersects the new AD curve. At point B real GDP falls to Y₂ (< Yₑ), the price level falls from P₁ to P₂ and the economy experiences a recessionary (or deflationary) gap because output is below the economy’s potential. Unemployment rises above the natural rate as firms cut production and lay off workers. In the long run, because prices and wages are flexible, SRAS will shift rightwards (or AD may shift back) until the economy returns to the LRAS at a new equilibrium (point C) at the original price level or a lower one, depending on expectations. To close the recessionary gap in the short run, expansionary fiscal policy (increased government spending or tax cuts) or expansionary monetary policy (lowering interest rates, quantitative easing) could shift AD back to the right, restoring output to its potential and reducing unemployment.

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