IB Economics SL — Variations in Economic Activity: Aggregate Demand and Aggregate Supply: Notes, Questions & Solutions

AD = C+I+G+(X−M), and why SRAS and LRAS shifts mean very different things for inflation — the diagrams and shift rules explained properly.

Aggregate demand (AD = C + I + G + (X−M)) is total spending in an economy, and aggregate supply is total output at a given price level; their intersection determines the equilibrium level of national income and the price level.

Key points

AD components: Consumption, Investment, Government spending, and Net exports (Exports minus Imports).
A rightward AD shift raises real output and the price level — the risk of demand-pull inflation.
Short-run AS shifts reflect changing costs (wages, input prices); long-run AS shifts reflect genuine capacity changes.
These diagrams are the foundation for evaluating fiscal policy and other demand-management tools.

Practice questions

Write out the AD equation and label each component. (AD = C + I + G + (X − M): Consumption, Investment, Government spending, Net exports.)
What happens to the price level and real output if AD shifts right along an upward-sloping AS curve? (Both the price level and real output rise.)
Name two factors that could cause a leftward shift in short-run aggregate supply. (A rise in wage costs, or a rise in the price of imported raw materials.)
Distinguish between a shift in SRAS and a shift in LRAS. (SRAS shifts reflect temporary cost changes; LRAS shifts reflect a genuine change in the economy’s productive capacity, such as new technology.)
Explain why a rightward shift in LRAS is generally more desirable than a rightward shift in AD alone. (LRAS growth increases output without the inflationary pressure that pure demand-side AD growth can cause.)

Written by sortmyprep | Reviewed by IB Teacher | Last updated: September 15, 2026