Page 234 - Krugmans Economics for AP Text Book_Neat

in government purchases during World War II. In 2008, the U.S. econ-
omy experienced another significant negative demand shock as the
housing market turned from boom to bust, leading consumers and
firms to scale back their spending.
Figure 19.2 shows the short -run effects of negative and positive de-
mand shocks. A negative demand shock shifts the aggregate demand
curve, AD, to the left, from AD 1 to AD 2 , as shown in panel (a). The
economy moves down along the SRAS curve from E 1 to E 2 , leading to
lower short-run equilibrium aggregate output and a lower short-run
equilibrium aggregate price level. A positive demand shock shifts the
aggregate demand curve, AD, to the right, as shown in panel (b). Here,
© Bettmann/CORBIS to higher short-run equilibrium aggregate output and a higher short-
the economy moves up along the SRAS curve, from E 1 to E 2 . This leads
run equilibrium aggregate price level. Demand shocks cause aggregate
output and the aggregate price level to move in the same direction.

figure 19.2 Demand Shocks

(a) A Negative Demand Shock (b) A Positive Demand Shock
Aggregate Aggregate
price price
level level
A negative A positive
demand shock... demand shock...
SRAS SRAS

P 1 E 1 ...leads to a lower P 2 E 2 ...leads to a higher
aggregate price aggregate price
P 2 level and lower P level and higher
E 2 aggregate output. 1 E 1 aggregate output.
AD
AD 1 2
AD 2 AD 1
Y 2 Y 1 Real GDP Y 1 Y 2 Real GDP

A demand shock shifts the aggregate demand curve, moving the ag- from P 1 to P 2 and aggregate output from Y 1 to Y 2 . In panel (b), a
gregate price level and aggregate output in the same direction. In positive demand shock shifts the aggregate demand curve right-
panel (a), a negative demand shock shifts the aggregate demand ward, increasing the aggregate price level from P 1 to P 2 and aggre-
curve leftward from AD 1 to AD 2 , reducing the aggregate price level gate output from Y 1 to Y 2 .

Shifts of the SRAS Curve

An event that shifts the short -run aggregate supply curve, such as a change in com-
modity prices, nominal wages, or productivity, is known as a supply shock. A negative
supply shock raises production costs and reduces the quantity producers are willing to
supply at any given aggregate price level, leading to a leftward shift of the short -run ag-
gregate supply curve. The U.S. economy experienced severe negative supply shocks fol-
lowing disruptions to world oil supplies in 1973 and 1979. In contrast, a positive supply
shock reduces production costs and increases the quantity supplied at any given aggre-
gate price level, leading to a rightward shift of the short -run aggregate supply curve.
The United States experienced a positive supply shock between 1995 and 2000, when
An event that shifts the short -run aggregate the increasing use of the Internet and other information technologies caused produc-
supply curve is a supply shock. tivity growth to surge.
192 section 4 National Income and Price Determination