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AD1
AD0
AD2
Goods & Services
(real GDP)
P100
P95
AD
Goods & Services
YF1 YF2 (real GDP)
Short-run effects of
P105 an unanticipated
increase in AD
P100
AD2
AD1
Goods & Services
YF Y2 (real GDP)
P110
Long-run effects of
P105 an unanticipated
increase in AD
P105
AD2
AD1
Goods & Services
YF Y2 (real GDP)
Short-run effects of
an unanticipated
reduction in AD
P100
P95
AD2 AD1
Goods & Services
Y2 YF (real GDP)
Long-run effects of
an unanticipated
P100 reduction in AD
P95
P90
AD2 AD1
Goods & Services
Y2 YF (real GDP)
P100
P95
AD
Goods & Services
YF Y2 (real GDP)
S1
Pr2
Pr1
D
Quantity of
Q2 Q1 resources
• Suppose there is an adverse supply shock, perhaps as the
result of a crop failure or a sharp increase in the world price
of a major resource, such as oil.
• Here we show the impact in the resource market: prices rise
from Pr1 to Pr2.
Copyright 2003 South-Western
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Thomson Learning. All rights reserved.
Supply Shock: Product Market
Price
Level SRAS2 (Pr2 )
LRAS
SRAS1 (Pr1 )
P110
P100
AD
Goods & Services
Y2 YF (real GDP)
B
P110
P100 A
AD
Goods & Services
Y2 YF (real GDP)
Unemployment greater
YF
than Natural Rate
Unemployment greater
YF Unemployment less
than Natural Rate than Natural Rate
SRAS1
P100
In the short-run,
output may exceed AD1
or fall short of
the economy’s AD2 Higher real interest
full-employment rates reduce AD
capacity (YF).
Goods & Services
YF Y1 (real GDP)
SRAS2
P100
In the short-run,
output may exceed AD2
or fall short of
the economy’s AD1 Lower real interest
full-employment rates increase AD
capacity (YF).
Goods & Services
Y1 YF (real GDP)