Short-run equilibrium is where AD = SRAS. A shock to either curve moves it.
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Two kinds of shock
Demand shock
A sudden change in C, I, G or X − M: AD shifts.
Supply shock
A sudden change in costs or capacity: energy prices, droughts, wars. SRAS shifts.
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Monetarists say the economy corrects itself in the long run.
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The points to remember
- Long-run equilibrium: AD = SRAS on LRAS, unemployment at its natural rate.
- Flexible wages close any gap: only the price level changes in the long run.
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Keynesians say it can get stuck.
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Remember it as: Monetarist: wages fall, gap closes. Keynesian: wages stick, gap stays.
Paper 1 asked this in May 2025, as part (a) for 10 marks.
Explain why, according to the Keynesian model, a country may experience a persistent deflationary (recessionary) gap.
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See the answer broken into clear points, with guidance on how each point earns marks.
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What the diagram must show
- Axes: price level up, real GDP across.
- A Keynesian AS (flat, rising, vertical) with Yf marked.
- AD crossing the flat part at Y1, well below Yf: the gap labelled.
How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |