Aggregate Supply

Examples of positive supply shocks are decreases in oil prices, lower union pressures, and a great crop season. Basically, anything that drastically and immediately decreases the cost of output is considered a positive supply shock. Examples of adverse supply shocks are increases in oil prices, higher union pressures, and a drought that destroys crops. Basically, anything that drastically and immediately increases the cost of output is considered an adverse supply shock.

In the short run, both the price level and output increase as the new aggregate demand curve meets the short-run aggregate supply curve at a new intersection that is to the upper right of the old intersection. But, as the economy adjusts, the short-run aggregate supply curve shifts until the economy is again in long-run equilibrium at a higher price level with output unchanged.

In the short run, both the price level and output decrease as the new aggregate demand curve meets the short-run aggregate supply curve at a new intersection that is to the lower left of the old intersection. But, as the economy adjusts, the short-run aggregate supply curve shifts until the economy is again in long-run equilibrium at a lower price level with output unchanged.

In the short run, the price level decreases and output increases as the new short-run aggregate supply curve meets the aggregate demand curve at a new intersection that is to the lower right of the old intersection. But, as the economy adjusts, the aggregate demand curve shifts until the economy is again in long-run equilibrium at a lower price level with output unchanged.

In the short run, the price level increases and output decreases, also known as stagflation, as the new short-run aggregate supply curve meets the aggregate demand curve at a new intersection that is to the upper left of the old intersection. But, as the economy adjusts, the aggregate demand curve shifts until the economy is again in long- run equilibrium at a lower price level with output unchanged.