Switch between Classical SR, Classical and Keynesian models. Explore fiscal stimulus, supply shocks, output gaps and long-run growth. Built for AQA, Edexcel and OCR.
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Set up a scenario, then ask Otti to analyse it, explain the economics, or mark your exam technique — just like a real tutor would.
Equilibrium at Y = 57.1, PL = 88.6.
Recessionary gap of 2.9: actual output is below potential. Expect deflationary pressure and rising unemployment.
Aggregate demand (AD) and aggregate supply (AS) explain how the price level and real output are determined for the whole economy. This tool lets you shift AD, short-run AS and long-run AS in classical and Keynesian versions of the model and shows the output gap that results, so you can separate demand-side changes from supply-side ones.
Label the axes price level and real output, label every curve, and mark both the original and new equilibria (PL₁, Y₁ and PL₂, Y₂). Say which model you are using and why: the Keynesian AS curve is useful when the economy has spare capacity, the classical LRAS when it is close to full employment. Then explain the shift as a chain of analysis: what causes it, which component of AD or which cost changes, how the price level and real output respond, and the knock-on effects on unemployment, inflation and the balance of payments.
Evaluate: The effect of a rise in AD depends on how much spare capacity the economy has. With a large negative output gap, extra spending raises real output and employment with little inflation; close to full capacity it mainly raises the price level. Economists also disagree about how quickly the economy returns to potential output on its own: classical economists expect wages and prices to adjust, while Keynesians argue the economy can stay below full employment for a long time.
Revise the theory behind this tool in our Edexcel revision notes:
Practise drawing the static versions you will need in the exam:
Short-run aggregate supply shows the total output firms will supply at each price level when costs such as money wages and raw material prices are fixed. It slopes upwards and shifts when costs change. Long-run aggregate supply shows the economy’s productive capacity. In the classical model it is vertical at potential output and shifts when the quantity or quality of resources changes.
The classical LRAS is vertical at full-employment output, because in the long run wages and prices adjust and output returns to potential. The Keynesian AS curve is flat at low output, where there is plenty of spare capacity, curves upwards as bottlenecks appear and becomes vertical at full capacity. The model you use affects the predicted impact of demand-side policy.
An output gap is the difference between actual real output and potential output. A negative output gap means the economy is producing below capacity, with unemployment and spare resources, and usually low inflation. A positive output gap means it is producing above its sustainable level, which creates pressure on wages and prices. Output gaps cannot be measured directly, so they are estimated.