The Effects Of A Shift In Aggregate Supply

Imagine once again an economy in its long-run equilibrium. Now suppose that suddenly some firms experience an increase in their costs of production. For example, bad weather in farm states might destroy some crops, driving up the cost

Figure 31-10

An Adverse Shift in Aggregate Supply. When some event increases firms' costs, the short-run aggregate-supply curve shifts to the left from AS^ to AS2. The economy moves from point A to point B. The result is stagflation: Output falls from Y1 to Y2, and the price level rises from P1 to P2.

Price Level

1. An adverse shift in the short-run aggregate-supply curve . . .

Price Level

Short Run Aggregate Supply Curve Shifts

1. An adverse shift in the short-run aggregate-supply curve . . .

2. . . . causes output to fall . . ./ Output of producing food products. Or a war in the Middle East might interrupt the shipping of crude oil, driving up the cost of producing oil products.

What is the macroeconomic impact of such an increase in production costs? For any given price level, firms now want to supply a smaller quantity of goods and services. Thus, as Figure 31-10 shows, the short-run aggregate-supply curve shifts to the left from AS1 to AS2. (Depending on the event, the long-run aggregate-supply curve might also shift. To keep things simple, however, we will assume that it does not.)

In this figure we can trace the effects of the leftward shift in aggregate supply. In the short run, the economy moves along the existing aggregate-demand curve, going from point A to point B. The output of the economy falls from Y1 to Y2, and the price level rises from P1 to P2. Because the economy is experiencing both stagnation (falling output) and inflation (rising prices), such an event is sometimes stagflation called stagflation.

a period of falling output What should policymakers do when faced with stagflation? As we will discuss and rising prices more fully later in this book, there are no easy choices. One possibility is to do nothing. In this case, the output of goods and services remains depressed at Y2 for a while. Eventually, however, the recession will remedy itself as perceptions, wages, and prices adjust to the higher production costs. A period of low output and high unemployment, for instance, puts downward pressure on workers' wages. Lower wages, in turn, increase the quantity of output supplied. Over time, as the short-run aggregate-supply curve shifts back toward AS1, the price level falls, and the quantity of output approaches its natural rate. In the long run, the economy returns to point A, where the aggregate-demand curve crosses the longrun aggregate-supply curve.

Alternatively, policymakers who control monetary and fiscal policy might attempt to offset some of the effects of the shift in the short-run aggregate-supply

Price Level

3. . . . which causes the price level to rise further . . .

Price Level

3. . . . which causes the price level to rise further . . .

Adverse Shift Aggregate Supply

Natural rate of output

Quantity of Output

Figure 31-11

Accommodating an Adverse Shift in Aggregate Supply. Faced with an adverse shift in aggregate supply from AS-j to AS2, policymakers who can influence aggregate demand might try to shift the aggregate-demand curve to the right from AD1 to AD2. The economy would move from point A to point C. This policy would prevent the supply shift from reducing output in the short run, but the price level would permanently rise from P1 to P3.

Natural rate of output

Quantity of Output

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Responses

  • barbara
    How would aggregate supply and demand effect the economy?
    8 years ago
  • gundabald labingi
    Does a recession cause the long run aggregate supply curve to shift?
    8 years ago
  • Christian
    What might shift the aggregatesupply curve to the left?
    8 years ago
  • amina
    What might shift the aggregatedemand curve to the left?
    8 years ago
  • Anja
    What Shifts Aggregate Supply?
    8 years ago
  • genet tewolde
    How would the increase in the oil price affect short run aggregate supply?
    8 years ago
  • Selina
    When prices of oil falls the aggregate demand curve shifts?
    7 years ago
  • danait
    What are the effects of aggregate deman shifts?
    7 years ago
  • Asmara
    What effects the price level along the short run aggregate supply curve?
    7 years ago
  • Martha
    Does aggregate demand shifting left cause stagflation?
    7 years ago
  • Primula
    What are the effects of the aggregate demand cure shifting left?
    7 years ago
  • peter
    When price level falls the aggregate supply curve shifts to the?
    7 years ago
  • saare
    What are the consequences of the shifts in aggregate demand?
    7 years ago
  • ronja kauppi
    What effects the aggregate demand curve?
    7 years ago
  • dylan
    What are the effects of aggregate demand and aggregate supply?
    7 years ago
  • lena
    Can both Aggregate demand and aggregate supply curve shift?
    7 years ago
  • alexandra
    Does a strike cause long run aggregate supply curve to shift?
    7 years ago
  • PASI
    What might cause the agregatted to shift?
    7 years ago
  • BERTHA BURROWS
    What cause the great recession demand shift or supply shift?
    7 years ago
  • noemi capon
    What happens to the price level if policymakers increase aggregate demand?
    6 years ago
  • Birikti
    What shift in agregate supply or aggregate demand will cause the fall in prices and GDP TO FALL?
    6 years ago
  • Fre-Swera
    What affects aggregate supply and demand in long run equilibrium?
    6 years ago
  • cirilla piazza
    What shifts in aggregate demand cause stagflation?
    6 years ago
  • israel
    What is the effect of shift in demand?
    6 years ago
  • theobald
    What are the effects of aggregate demand shifts?
    6 years ago
  • falco
    What would be an adverse supply shift?
    6 years ago
  • diane
    How would an adverse shift in aggregate supply effect an economy?
    5 years ago
  • owen
    What curve does stagflation shift?
    5 years ago
  • gundabald
    How would an adverse shift in aggregate supply move the economy?
    7 months ago

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