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24.3 Aggregate Demand and Supply Shocks - Coggle Diagram
24.3 Aggregate Demand and Supply Shocks
Positive AD Shocks
1) Raises prices and real GDP above Y* → inflationary gap
2) As firms respond by increasing their output prices (inflationary gap), AS curve begins shifting up
3)
upward shift of AS curve causes further rise in P, but rise in price leads to a fall in Y
; this process continues until inflationary gap is removed (Y falling will result back to Y*)
Negative AD Shocks
1) Fall in output and some downward adjustment of prices
2) As real GDP falls below potential, recessionary gap is created
Flexible Wages
when wages and other factor prices fall quickly in response to excess supply factors
; resulting shift in AS curve eliminates recessionary gaps
AS curve shifts downward economy would move along new AD curve with falling prices and rising output
Sticky Wages
AS curve shifts more slowly
when wages are stuck thus adjustment process may not close recessionary gap for a while
stabilization policy
(gov.) can be brought into play as speedy recovery is generated from demand side
Aggregate Supply Shocks
1) an increase in world price of an input, oil for example, causes increase in unit costs and AS curve to shift upward
2) Real GDP falls and P increases (i.e stagflation)
*sticky wages reduces speed of adjustment
3) wages falling causes AS curve to shift back toward starting point, and real GDP rises back toward Y*
*relative prices change even if economy returns to normal;
exogenous changes in input prices cause AS curve to shift creating output gap; i.e oil, copper, etc.
Long-Run Equilibrium
When intersection of AD and AS curves occurs at Y*
a
long-run aggregate supply curve
= vertical line at Y
;
*it's the relationship b/w P and amount of output supplied by firms after all factor prices have a adjusted to output gaps
real GDP determined solely by Y*
; role of aggregate demand is only to determine P
shifts in AD curve will cause a change in P in long run but not affect Y*; changes in P b/c change in AE leads to change in P