Theory Bank
Interactive A-Level & IB macroeconomics concepts with graphs, formulas, and flashcards.
The AD curve shows the total demand for goods and services at different price levels. It slopes downward because: (1) wealth effect — higher prices reduce real wealth; (2) interest rate effect — higher prices raise interest rates, reducing investment; (3) exchange rate effect — higher prices reduce exports. The SRAS curve slopes upward because firms supply more at higher prices. The LRAS is vertical at the natural rate of output.
Key Formula
AD = C + I + G + (X - M)AD Curve (Price Level vs Real GDP)
Key Points
AD shifts right with fiscal/monetary stimulus
Negative supply shock shifts SRAS left
LRAS shifts right with productivity growth
Stagflation: SRAS shifts left → higher P, lower Y