Interactive Graph

An interactive cartesian graph is displayed, the elements on the graph and the starting position look as follows.

Description.

When interaction is completed properly the new positions of the elements have changed to look as follows.

Description.

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Image of a cartesian graph is displayed, the elements on the graph and the starting position look as follows. Description

Experiment with the aggregate demand and short-run aggregate supply curves.

A leftward shift in the SRAS can be caused by a negative supply shock, such as a severe weather event, that decreases the supply of a major crop.

There are many factors that shift the SRAS to the left. Can you think of others?

A rightward shift in the SRAS can be caused by workers’ and firms’ expectation of a lower price level. Negotiations produce a labor agreement with lower wages which reduce labor costs increasing the overall level of supply in the economy.

There are many factors that shift the SRAS to the right. Can you think of others?

A leftward shift in AD can be caused by a decrease in the real wealth of individuals. When national wealth decreases, there is less spending and a lower demand for goods and services in the economy.

There are many factors that shift the AD curve to the left. Can you think of others?

A rightward shift in AD can be caused by an increase in expected future income for the economy. When people expect future income, there is more current spending and a greater demand for goods and services in the economy.

There are many factors that shift the AD curve to the right. Can you think of others?

You have shifted the short-run aggregate supply curve to the left, which reflects a temporary DECREASE in the aggregate supply of goods and services in the economy. Notice that this change lowers the Real GDP (Y) and causes an increase in the Price Level (P). A permanent change in the aggregate supply would shift the long-run aggregate supply curve as well.

You have shifted the short-run aggregate supply curve to the right, which reflects a temporary INCREASE in the aggregate supply of goods and services in the economy. Notice that this change increases the Real GDP (Y) and causes a decrease in the Price Level (P). A permanent change in the aggregate supply would shift the long-run aggregate supply curve as well.

You have shifted the aggregate demand curve to the left, which reflects a DECREASE in the demand for goods and services in the economy. Notice that this lowers the level of Real GDP (Y) and the Price Level (P).

You have shifted the aggregate demand curve to the right, which reflects an INCREASE in the demand for goods and services in the economy. Notice that this raises the level of Real GDP (Y) and the Price Level (P).

A shift to the left reflects a decrease in the aggregate supply of goods and services in the economy because it shows that now, at the same price level, the quantity of Real GDP (Y) supplied had declined.

Now the overall economy is supplying fewer goods and services but is still demanding the same amount. The macroeconomy is out of equilibrium, and a shortage of goods and services will occur.

Market forces will correct for this shortage by increasing the price level in the economy until the shortage disappears and we are at the market equilibrium price level (P2). This is how a decrease in SRAS causes a temporary increase in the price level (P).

Since the disruption is temporary, eventually the SRAS curve will shift back to the long-run equilibrium.

A shift to the right reflects an increase in the aggregate supply of goods and services in the economy because it shows that now, at the same price level, the quantity of Real GDP (Y) supplied has increased.

Now the overall economy is supplying more goods and services but is still demanding the same amount. The macroeconomy is out of equilibrium, and a surplus of goods and services will occur.

Market forces will correct for this surplus by decreasing the price level in the economy until the surplus disappears and we are at the market equilibrium price level (P2). This is how an increase in SRAS causes a temporary increase in the price level (P).

Since the disruption is temporary, eventually the SRAS curve will shift back to the long-run equilibrium.

A shift to the left reflects a decrease in the aggregate demand for goods and services in the economy because it shows that now, at the same price level, the quantity of Real GDP (Y) demanded has decreased.

Now the overall economy is demanding fewer goods and services but is still supplying the same amount. The macroeconomy is out of equilibrium, and a surplus of goods and services will occur.

Market forces will correct for this surplus by decreasing the price level in the economy until the surplus disappears and we are at the market equilibrium price level (P2). This is how a decrease in AD causes a temporary decrease in the price level (P).

Since the price level is now lower than expected, the next negotiations between firms and workers will result in lower wages, shifting the SRAS to the right and back to macroeconomic equilibrium at P3.

A shift to the right reflects an increase in the aggregate demand for goods and services in the economy because it shows that now, at the same price level, the quantity of Real GDP (Y) demanded has increased.

Now the overall economy is demanding more goods and services but is still supplying the same amount. The macroeconomy is out of equilibrium, and a shortage of goods and services will occur.

Market forces will correct for this shortage by increasing the price level in the economy until the shortage disappears and we are at the market equilibrium price level (P2). This is how an increase in AD causes a temporary increase the price level (P).

Since the price level is now higher than expected, the next negotiations between firms and workers will result in higher wages, shifting the SRAS to the left and back to macroeconomic equilibrium at P3.