Aggregate Demand and Aggregate Supply ❮ 117
Figure 9.15
LRAS SRAS
0
SRAS 1
Price
Level
Real GDP
AD
PL 0
GDPf
Figure 9.16
LRAS
Real GDP
AD
SRAS 1
SRAS 0
PL 0
GDPf
Price
Level
In the long run, however, the high unemployment should eventually relieve pressure on
nominal input prices. When the input prices begin to fall, the SRAS shifts back to the
right, returning the economy to full employment.
Supply Shocks
These shifts in SRAS are caused by events that are called supply shocks. A supply
shock is an economywide phenomenon that affects the costs of firms, positively or
negatively. Positive supply shocks might be the result of higher productivity or lower
energy prices. Negative supply shocks usually occur when economywide input prices
suddenly increase, like the OPEC oil embargoes of the 1970s or the Gulf War of 1990
to 1991.
• ↑ AD causes ↑ real GDP, ↓ unemployment and ↑ price level.
• ↓ AD causes ↓ real GDP, ↑ unemployment and ↓ price level.
• ↑ SRAS causes ↑ real GDP, ↓ unemployment and ↓ price level.
• ↓ SRAS causes ↓ real GDP, ↑ unemployment and ↑ price level.
“Make it easier
for the graders
and use flow
charts to answer
free-response
questions instead
of long essays.”
—Justine,
AP Student