Explore how aggregate supply and aggregate demand shape the economy. Adjust interest rates, AS, and AD to see real-time impacts on price levels, inflation, and GDP growth.
The Aggregate Demand-Aggregate Supply (AS-AD) model is a fundamental macroeconomic framework that explains how the overall economy functions. It shows the relationship between the total demand for goods and services (AD) and the total supply of goods and services (AS) in an economy.
The total demand for all goods and services in an economy. It consists of consumption (C), investment (I), government spending (G), and net exports (X-M). The AD curve slopes downward - when price levels rise, aggregate demand falls.
Represents total production in the short term when some prices are "sticky" and slow to adjust. The SRAS curve slopes upward - as price levels increase, firms are willing to produce more output.
Shows the economy's potential output at full employment. The LRAS is vertical because in the long run, output is determined by factors like technology and resources, not by price levels.
The intersection of AS and AD curves determines the equilibrium price level and real GDP. When these curves shift due to changes in interest rates, government policy, or other factors, both price levels (inflation) and output (GDP) are affected.
Interest rates play a crucial role: when central banks raise interest rates, borrowing becomes more expensive, reducing consumption and investment spending, which shifts the AD curve leftward. This typically reduces both inflation and GDP growth.
Adjust the controls below and watch how the economy responds in real-time!
Source: Interactive simulation based on macroeconomic AS-AD model principles
Source: Interactive simulation showing dynamic economic responses
Raising Interest Rates: Higher interest rates reduce aggregate demand (AD shifts left), leading to lower price levels and reduced GDP. This is how central banks fight inflation.
Increasing AD: More government spending or consumer confidence shifts AD right, increasing both prices (inflation) and GDP growth - but may cause overheating.
Supply Shocks: Positive supply shifts (new technology, lower oil prices) move SRAS right, lowering prices while increasing GDP - the best of both worlds!
Negative Supply Shocks: Events like supply chain disruptions shift AS left, causing stagflation - higher prices with lower output.
Central banks like the Federal Reserve use interest rate policy to manage the economy. By raising rates, they can cool down an overheating economy and reduce inflation. By lowering rates, they stimulate borrowing and spending to boost economic growth during recessions.
The AS-AD model helps explain major economic events like the 2008 financial crisis (sharp leftward AD shift), COVID-19 pandemic (both AD and AS shocks), and inflation surges (supply chain disruptions shifting AS left).