Shifts in Aggregate Supply in the A1

# Shifts in Aggregate Supply in the A1 - supply curve until...

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Shifts in Aggregate Supply in the AS-AD Model 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-run aggregate
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Unformatted text preview: supply curve until the long-run aggregate supply curve, the short-run aggregate supply curve, and the aggregate demand curve all intersect. This is represented by point C and is the new equilibrium where short-run aggregate supply curve 2 equals the long-run aggregate supply curve and aggregate demand curve 2. Thus, a positive supply shock causes output to increase and the price level to decrease in the short run, but only the price level to decrease in the long run. Figure %: Graph of an adverse supply shock in the AS- AD model Let's work through another 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....
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## This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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