Many economic events - esp. changes in
the world prices of raw materials - cause
AD and AS shocks both AD and AS shocks in the same
economy. The overall effect on GDP in
that economy depends on the relative
importance of the two separate effects.
AD shocks cause the price level
and real GDP to change in the
AD shocks same direction; both rise with
an increase in AD, and both fall
with a decrease in AD.
When the AS curve is upward
sloping, an AD shock leads to a
AD shocks - the change in the price level. As a
multiplier when P varies
result, the multiplier is smaller
than the simple multiplier.
For any given price level, the
AD curve shows the level of
aggregate demand curve real GDP for which desired
aggregate expenditure equals
If their unit costs rise with
AS curve - prices and output, price-taking firms will
produce more only if price
output (1) increases. They will produce
less if the price falls. Price-setting firms will increase their
prices when they expand their output into
AS curve - prices and the range where unit costs are rising.
They will eventually decrease their prices
output (2) if a reduction in their output leads to a
reduction in unit costs.
The actions of both price-taking and
AS curve - prices and price-setting firms cause the price
level and the supply of output to be
output (3) positively related - the AS curve is
AS shocks cause the price level and
real GDP to change in opposite
AS shocks directions. With an increase in
supply, the price level falls and
GDP rises; and vice versa.
AD and AS shocks are labelled
changes in the according to their effect on
macroeconomic real GDP. Positive shocks