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Unformatted text preview: Let's work through an example. For this example, refer to . Notice that we begin at point A where short-run aggregate supply curve 1 meets the long-run aggregate supply curve and aggregate demand curve 1. Thus, we are in long-run equilibrium to begin. Now say that a positive supply shock occurs: a reduction in the price of oil. In this case, the short-run aggregate supply curve shifts to the right from short-run aggregate supply curve 1 to short-run aggregate supply curve 2. The intersection of short- run aggregate supply curve 2 and aggregate demand curve 1 has now shifted to the lower right from point A to point B. At point B, output has increased and the price level has decreased. This is the new short-run equilibrium. However, as we move to the long run, aggregate demand adjusts to the new price level and output level. When this occurs, the aggregate demand curve shifts along the short-and output level....
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- Fall '11