Key Idea: Topic 3.2 introduces the **AD/AS model** — the most important diagram in macroeconomics. It shows how the **price level** and **real GDP** are determined, and how shocks affect the economy.
✅ Core definitions
📉 Why AD slopes downward
🔄 What shifts AD?
📊 SRAS vs LRAS
SRAS: Upward-sloping. Shifts with **input costs** (wages, oil). Taxes, subsidies, supply shocks. Short-run price adjustments.
LRAS: Vertical at potential output. Shifts with **productive capacity**. Technology, labour force, capital. Long-run growth.
AD shifts affect **actual** output (short run). LRAS shifts affect **potential** output (long run). Know which diagram to draw for each policy.