Cambridge A Level Economics: Components of AD, the accelerator and output gaps (9708) – Revision Notes

Full explanations are in the study guide. These notes condense outcomes 9.1.2 and 9.1.3 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 9 is A Level content only. The numbers are made up to show the method and are not real data. The multiplier and the propensities (9.1.1) have their own unit. Use the hub, the checklist, the practice questions and the free 10-minute diagnostics.

Key terms

Term	Meaning
Aggregate demand	C + I + G + (X - M): total planned spending on domestic output
Autonomous consumption	Consumption that does not depend on current income (intercept a in C = a + bY)
Induced consumption	Consumption that changes with income (the bY part)
Autonomous saving	Saving that does not depend on income; negative at zero income (dissaving)
Induced saving	The part of saving that rises with income
Autonomous investment	Investment not driven by current income or output
Induced investment	Investment that responds to income, especially to changes in output
Accelerator	Net investment depends on the change in output
Net exports	Exports minus imports
Full employment national income	Output when resources are used at normal capacity
Equilibrium national income	Where planned AD equals national income
Deflationary gap	Shortfall of AD below the level needed for full-employment output
Inflationary gap	Excess of AD over the level that full-employment output can supply

Consumption and saving

• C = a + bY. Slope b is the induced part; intercept a is autonomous.
• S = Y - C, so S = -a + (1 - b)Y when there is no tax. The intercept is negative.
• Change in income: movement along the function. Change in wealth, interest rates, credit, confidence, expectations or age structure: shift.
• A rise in autonomous consumption lowers autonomous saving by the same amount.

Worked reminder (Country D, illustrative). C = 30 + 0.8Y.

• At Y = 250: induced = 0.8 × 250 = 200, so C = 230 and S = 250 - 230 = 20.
• At Y = 500: C = 30 + 400 = 430 and S = 70.
• Check S = -30 + 0.2Y: at 500 gives -30 + 100 = 70. Correct.

Investment and the accelerator

Determinants of investment: interest rates, expected profit and confidence, growth of demand, technology, corporation tax, availability of credit, price of capital goods.

Method in steps (accelerator).

1. Find the change in output each period.
2. Multiply by the accelerator coefficient v to get net investment.
3. Add replacement (depreciation) to get gross investment.
4. If net investment is negative, gross investment cannot fall below zero; the capital stock falls only by depreciation.

Worked reminder (Country E, illustrative; v = 2.5).

Output	Change	Net investment
400
420	+20	50
450	+30	75
460	+10	25

Output keeps rising, but net investment falls from 75 to 25 once growth slows. This is the main point to make in an answer.

Worked reminder: the floor on gross investment (Country E continued). Suppose v = 2.5, depreciation is 6 a year and output falls from 460 to 450. Required capital falls by 2.5 × 10 = 25, so desired net investment is -25. Firms can shed only 6 through depreciation, so gross investment is 0, capital falls by 6, and 19 units of capital sit idle.

Limits: spare capacity, firms judging demand to be temporary, capital supply constraints, credit conditions, interest rates and confidence also matter, v is not fixed.

Government spending and net exports

• G counts purchases of goods and services (pay of public employees, capital projects). Transfer payments are excluded; they reach AD through C.
• G is mostly autonomous. Determinants: policy priorities, the stage of the cycle, the budget deficit and debt, fiscal policy aims.
• Net exports = X - M. Exports depend on foreign income, the exchange rate, relative prices and trade barriers. Imports are largely induced by domestic income, with an autonomous part.
• A rise in G or X shifts the AD schedule up by that amount at each income.

Worked reminder. Country A has X = 130 and M = 10 + 0.1Y. At Y = 600, M = 10 + 60 = 70 and X - M = 60. If Y rises to 800, M = 90 and X - M = 40. Net exports fall as income rises.

Equilibrium and the gaps

Case	Condition	Gap measured as
Equilibrium	AD = Y	none
Deflationary gap	Equilibrium income below full employment	Vertical shortfall of AD at full employment
Inflationary gap	Equilibrium income above full employment	Vertical excess of AD at full employment

Worked reminder: deflationary gap. Country G has AD = 100 + 0.8Y and full employment income of 600. Equilibrium is where Y = 100 + 0.8Y, so 0.2Y = 100 and Y = 500. At Y = 600, AD = 100 + 480 = 580. Deflationary gap = 600 - 580 = 20. Income is 100 below full employment.

Worked reminder: inflationary gap. Country H has AD = 140 + 0.8Y and full employment income of 600. At Y = 600, AD = 140 + 480 = 620. Inflationary gap = 620 - 600 = 20. The model equilibrium is 700, but output cannot exceed capacity for long, so prices rise.

Diagram in words. Draw AD (vertical axis) against national income Y (horizontal axis). The 45-degree line shows AD = Y. The AD line crosses it at equilibrium. Mark full employment Y on the horizontal axis and read the vertical distance between the two lines there. If the AD line is below the 45-degree line, that is the deflationary gap. If above, that is the inflationary gap.

Chains of reasoning to practise

• Fall in consumer confidence: autonomous consumption falls, the consumption function shifts down, AD shifts down, equilibrium income falls, and if full employment income is unchanged a deflationary gap appears or widens. Firms sell less, so output, jobs and later investment fall.
• Fall in interest rates: borrowing is cheaper and saving less rewarding, so autonomous investment and autonomous consumption may rise, AD shifts up, and the effect depends on confidence and credit conditions.
• Foreign recession: exports fall, net exports fall, AD shifts down by the fall in exports, and an economy with a large export share is hit hardest.
• Spending boom in a near-capacity economy: AD rises beyond what output can meet, an inflationary gap opens, and firms raise prices and wages because they cannot raise output.

Evaluation prompts

• Full employment is an estimate, so gap sizes are uncertain.
• Whether a deflationary gap self-corrects depends on how flexible wages and prices are.
• Time lags: gaps may change before policy works.
• Investment is volatile because of the accelerator and confidence, so gaps can appear fast.
• Open economies: higher imports leak demand abroad.

Must-know distinctions

• Movement along a function versus a shift of it.
• Autonomous versus induced, in consumption, saving and investment.
• Level of output versus change in output (accelerator).
• Net investment versus gross investment.
• Transfer payments versus government spending on goods and services.
• Equilibrium income versus full employment income.
• Gap in AD versus gap in income.

Quick self-test

1. A consumption function is C = 25 + 0.9Y. Find autonomous and induced consumption at Y = 200.
2. Name two causes of a shift of the consumption function.
3. With v = 3, output rises by 15. Find net investment, and gross investment if depreciation is 20.
4. Output grows 800, 840, 860 with v = 3. Find net investment each year. What happens to investment, and why?
5. Why can gross investment not be negative?
6. A government spends 50 on pay, 30 on pensions and 10 on roads. State G in AD.
7. X = 130 and M = 10 + 0.1Y. Find net exports at Y = 600.
8. C = 300, I = 80, G = 90, X = 70, M = 60. Find AD.
9. AD = 100 + 0.8Y, full employment 600. State the type and size of the gap.
10. Give one reason the size of a gap may be misjudged.

Answers

1. Autonomous 25; induced 0.9 × 200 = 180; C = 205.
2. For example, a fall in wealth, a rise in interest rates, a fall in confidence.
3. Net = 3 × 15 = 45; gross = 45 + 20 = 65.
4. Changes are +40 then +20, so net investment is 120 then 60. Investment halves although output rises, because the change in output has fallen.
5. Firms can only cut capital by not replacing it, so the most they can reduce capital is by the depreciation.
6. G = 50 + 10 = 60; pensions are transfers.
7. 130 - (10 + 60) = 60.
8. 300 + 80 + 90 + 70 - 60 = 480.
9. Deflationary gap of 20 (AD at 600 is 580).
10. Full employment income is only an estimate, so AD at that point is uncertain.

Where marks are usually lost

• Writing that the accelerator links investment to the level of national income.
• Leaving transfer payments in G.
• Using the wrong sign when finding the gap (full employment minus AD for deflationary; AD minus full employment for inflationary).
• Describing a shift in answers about changes in income.
• Forgetting that imports are subtracted in AD.
• Giving the income gap when the vertical AD gap was asked, or the reverse.
• Stating the gap without saying what happens to unemployment or prices.
• Concluding an evaluation without a condition.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, version 2, published by Cambridge University Press & Assessment. These notes cover outcomes 9.1.2 and 9.1.3.