Macro Foundations · intro
What moves on the Aggregate Supply – Aggregate Demand diagram
Higher energy costs raise production costs economy-wide, shifting SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. left, output falls and prices rise simultaneously.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
A geopolitical shock cuts oil supply; oil prices spike worldwide.
Energy is an input for nearly every producer, production costs rise at every output level, shifting SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. left.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: the price level rises while output falls, stagflationstagflationThe ugly combination of falling output and rising prices, the signature of a negative supply shock., the signature of a supply shock.
Note the policy dilemma: stimulating AD fights the recession but worsens inflationinflationA sustained rise in the overall price level, eroding money's purchasing power.; tightening does the reverse.
Examiners ask this as: oil shock, oil price spike, middle east conflict oil, opec cuts production, energy crisis.
Other scenarios on Aggregate Supply – Aggregate Demand