3.6 Changes in the AD–AS Model in the Short Run

Explain (using graphs as appropriate) the response of output, employment, and the price level to an aggregate demand or aggregate supply shock in the short run.

• A positive (negative) shock in AD causes output, employment, and the price level to rise (fall) in the short run.
• A positive (negative) shock in SRAS causes output and employment to rise (fall) and the price level to fall (rise) in the short run.
• Inflation can be caused by changes in aggregate demand (demand-pull) or aggregate supply (cost-push).
• Enduring understanding MOD-2: Economists use the aggregate demand–aggregate supply model to represent the relationship between the price level and aggregate output in an economy and to illustrate how output, employment, and the price level respond to macroeconomic shocks.