Aggregate demand and aggregate supply

Aggregate demand is total spending on final goods and services: consumption, investment, government spending and net exports. Aggregate supply is the economy's total output at each price level. A shift in either moves output, prices and employment together.

Aggregate demand	Consumption + investment + government spending + exports - imports
Demand shift right	Output and the price level both rise; unemployment tends to fall
Supply shift left	Output falls while the price level rises
Where it sits	Unit 3, Area of Study 2, and every policy in Unit 4

Say which side moves

Start every answer by naming the side: a change in spending moves aggregate demand, and a change in the cost or quantity of resources, or in productivity, moves aggregate supply.

Trace it to the goals

Then follow the shift to the domestic macroeconomic goals. A rise in aggregate demand lifts growth and employment but can push up inflation; a rise in aggregate supply can lift growth while easing inflation.

Use the data in the question

When a question gives a table or graph, quote its figures in your answer. Our practice uses invented data; in the examination, use the stimulus you are given.

Try 2 questions

Question 1

Quarterly real GDP growth in a hypothetical economy (invented figures)
Quarter	Real GDP growth (per cent, quarter on quarter)
Quarter 1	1.2
Quarter 2	0.8
Quarter 3	0.1
Quarter 4	−0.4
Quarter 5	−0.6
Quarter 6	−0.2
Quarter 7	0.5

The table shows quarterly growth in a hypothetical economy's real GDP. In which quarter did the level of real GDP reach its lowest point, the trough?

Question 2

The diagram shows a hypothetical economy. Over several years aggregate demand grows from AD1 to AD2, and aggregate supply policies raise aggregate supply from AS1 to AS2. Compared with the first equilibrium, which describes the new equilibrium?

Next step

Take the free test The aggregate demand and supply lesson

Questions people ask

What is the difference between a demand-side and a supply-side factor?

A demand-side factor changes spending, such as household confidence. A supply-side factor changes the cost or amount of resources, or productivity, such as a rise in wages relative to output.

Which policies work through aggregate demand?

Monetary policy and budgetary policy are the aggregate demand policies in Unit 4. Aggregate supply policies work on productive capacity and efficiency.