3.6 Changes in the AD-AS Model in the Short Run

AP Macro 3.6 AD-AS Short-Run Changes Summary

A short-run change in the AD-AS model happens when aggregate demand or short-run aggregate supply shifts, changing real GDP, employment, and the price level at the same time. A positive AD shift raises all three, while a negative AD shift lowers them. A positive SRAS shift raises output and employment but lowers the price level, and a negative SRAS shift lowers output and employment while raising the price level.

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Why This Matters for the AP Macroeconomics Exam

The AD-AS model is one of the most tested tools in AP Macroeconomics, and short-run shifts show up constantly. You need to be able to take a scenario, decide whether it hits aggregate demand or short-run aggregate supply, draw the correct shift, and explain what happens to output, employment, and the price level.

This topic builds the cause-and-effect reasoning that multiple-choice questions reward and that free-response prompts often require when they ask you to draw a correctly labeled graph and explain the short-run results. Getting comfortable with these four outcome patterns now makes later topics like long-run self-adjustment, fiscal policy, and monetary policy much easier.

Key Takeaways

• A positive AD shift (rightward) raises real GDP, employment, and the price level; a negative AD shift (leftward) lowers all three.
• A positive SRAS shift (rightward) raises real GDP and employment but lowers the price level; a negative SRAS shift (leftward) lowers output and employment but raises the price level.
• Demand-pull inflation comes from AD increasing; cost-push inflation comes from SRAS decreasing.
• AD shifts when consumption, investment, government spending, or net exports change for reasons other than the price level.
• SRAS shifts when production costs change, such as from resource prices, productivity, or government actions that affect input costs.
• Always label your AD-AS axes "Price Level" and "Real GDP," not "Price" and "Quantity."

Determinants That Shift the Curves

Each curve responds to its own set of causes. Keep them separate so you shift the right one.

Aggregate demand is made of the four spending components of GDP:

• consumer spending
• investment spending
• government spending
• net exports (exports minus imports)

Any change in one of these that is not caused by the price level shifts AD left (decrease) or right (increase).

Short-run aggregate supply responds to anything that changes production costs, including:

• resource prices and availability
• productivity and technology
• government actions that affect input costs

When production costs rise, SRAS shifts left. When they fall, SRAS shifts right.

Supply Shocks

Beyond the usual determinants, sudden events called shocks can move SRAS.

Negative Supply Shock

A negative supply shock is an unexpected drop in the availability of a key resource that temporarily lowers productivity. It raises production costs and reduces the quantity producers will supply at any price level, which shifts SRAS to the left. The result is lower output, lower employment, and a higher price level.

Example application: the disruptions to world oil supplies in 1973 and 1979, when OPEC cut oil exports to the United States, pushed costs up across the economy. This is an illustration of a negative supply shock, not required AP content.

Positive Supply Shock

A positive supply shock is an unexpected increase in the availability of a key resource that temporarily raises productivity. It lowers production costs and increases the quantity producers will supply at any price level, shifting SRAS to the right. The result is higher output, higher employment, and a lower price level.

Example application: the spread of the internet and information technology in the late 1990s boosted productivity. Use this as an illustration, not as required AP content.

The Four Outcome Patterns

These four lines are the core of the topic. Memorize the direction of each variable.

Notice the key contrast: with AD shifts, output and the price level move in the same direction. With SRAS shifts, output and the price level move in opposite directions.

Demand-Pull and Cost-Push Inflation

Inflation in the short run can come from either side of the model.

• Demand-pull inflation happens when aggregate demand increases, shifting AD right and pulling the price level up. Output rises too.
• Cost-push inflation happens when short-run aggregate supply decreases, shifting SRAS left and pushing the price level up. Output falls at the same time.

The tell-tale difference: demand-pull comes with rising output, while cost-push comes with falling output.

Worked Scenarios

Practice turning a scenario into a shift and an outcome.

Scenario 1: Consumer income falls because taxes increase

Higher taxes leave consumers with less disposable income, so consumer spending drops. That decreases aggregate demand (AD shifts left). In the short run, the price level falls, real GDP falls, and employment falls (unemployment rises).

Scenario 2: The British government increases tariffs on imported inputs

Tariffs are taxes on goods. Taxing imported inputs raises the cost of resources firms use to produce, so production costs rise and firms supply less. SRAS shifts left. In the short run, the price level rises, real GDP falls, and employment falls (unemployment rises).

Scenario 3: Spanish exports become cheaper on the world market

Cheaper exports make other countries more willing to buy from Spain, so exports and net exports rise. That increases aggregate demand (AD shifts right). In the short run, the price level rises, real GDP rises, and employment rises (unemployment falls).

Scenario 4: Corporate taxes are reduced

Lower corporate taxes reduce production costs for firms, so they can produce more output. SRAS shifts right. In the short run, the price level falls, real GDP rises, and employment rises (unemployment falls).

How to Use This on the AP Macroeconomics Exam

MCQ

• Read the scenario and decide whether it changes spending (AD) or production costs (SRAS).
• Pick the shift direction, then match it to one of the four outcome patterns.
• Watch for questions that test whether output and price level move together (AD) or apart (SRAS).

Free Response

• Draw a correctly labeled AD-AS graph with "Price Level" on the vertical axis and "Real GDP" on the horizontal axis.
• Show the shift with a clear new curve and an arrow, and label the new equilibrium.
• Explain the short-run effect on real GDP, employment or unemployment, and the price level in words, not just on the graph.

Common Trap

• A change in the price level causes a movement along a curve, not a shift. Only non-price-level causes shift AD or SRAS.

Common Misconceptions

• Labeling axes "Price" and "Quantity." The AD-AS model uses "Price Level" and "Real GDP." Treating it like the single-market supply and demand model loses points.
• Thinking AD and SRAS always move output and price level the same way. AD shifts move them together; SRAS shifts move them in opposite directions.
• Assuming all inflation is the same. Demand-pull inflation comes with rising output, while cost-push inflation comes with falling output, so the cause matters.
• Confusing a shift with a movement. A price-level change moves you along the existing curve. A change in a determinant or a shock shifts the whole curve.
• Forgetting employment and unemployment move opposite each other. When output rises, employment rises and unemployment falls, with the labor force held constant.

Related AP Macroeconomics Guides

• 3.1 Aggregate Demand
• 3.2 Spending and Tax Multipliers
• 3.3 Short-Run Aggregate Supply (SRAS)
• 3.4 Long-Run Aggregate Supply (LRAS)
• 3.8 Fiscal Policy
• 3.5 Equilibrium in Aggregate Demand-Aggregate Supply (AD-AS) Model