5 Steps to a 5 AP Macroeconomics 2019

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