Macro Foundations · intermediate
What moves on the Aggregate Supply – Aggregate Demand diagram
Destroying productive capital cuts short-run supply sharply (SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. left) and dents potential outputpotential outputThe output an economy can sustain with normal use of its resources, where it returns once prices fully adjust. (LRASLRASLong-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level. left) until reconstruction.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
A disaster destroys capital, factories, roads, power infrastructure.
Production costs spike and capacity is disrupted. SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. shifts sharply left.
Destroyed capital also reduces potential outputpotential outputThe output an economy can sustain with normal use of its resources, where it returns once prices fully adjust.. LRASLRASLong-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level. shifts left (smaller, and it recovers as rebuilding occurs).
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: output falls, price level rises.
Examiners ask this as: natural disaster, earthquake, flood destroys, hurricane, bushfires.
Other scenarios on Aggregate Supply – Aggregate Demand