116 ❯ Step 4. Review the Knowledge You Need to Score High
Shifting SRAS
The macroeconomy is currently in equilibrium at full employment. In Figure 9.15, we
simplify the shortrun aggregate supply curve by drawing only the upwardsloping segment
(and this is the usual treatment of SRAS in the AP curriculum). If nominal input prices
were to fall, the SRAS curve shifts to the right. Assuming that the AD curve stays constant,
the price level falls, real GDP increases, and the unemployment rate falls. This kind of
supply-side boom would seemingly be the best of all situations, though it is likely to only
be temporary. When the economy is producing beyond GDPf, eventually the high demand
for production inputs will increase the prices of those inputs, shifting the SRAS curve back
to the left and returning the economy to full employment.
If an increase in SRAS is the best of possible macroeconomic situations, a decrease in
SRAS is one of the worst. Figure 9.16 shows that a decrease, or leftward shift, in SRAS
creates inflation, lowers real GDP, and increases the unemployment rate. This cost-push
inflation, or stagflation, creates very unpleasant economic conditions in the short run.AD 0Real GDPPrice
LevelPL ab
0GDP 0 GDP 1AD 1SRASAD 0Real GDPPrice
LevelPL a b
0GDP 0 GDP 1AD 1SRASb’GDP 2Figure 9.13Figure 9.14