Aggregate Supply: Problems 3

Problem : Give two examples of positive supply shocks and two examples of adverse supply shocks.

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.

Problem : What are the short-run and long-run effects of an increase in aggregate demand?

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.

Problem : What are the short-run and long-run effects of a decrease in aggregate demand?

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.

Problem : What are the short-run and long-run effects of a positive supply shock?

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.

Problem : What are the short-run and long-run effects of an adverse supply shock?

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.

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