U3.6 Changes in the AD-AS Model in the Short Run
Master AP Macro 3.6: predict how AD and SRAS shifts change real GDP, price level, and unemployment, and tell demand-pull from cost-push inflation.
What you'll do in this lesson
A voice-first session with the Crimsora tutor on U3.6 Changes in the AD-AS Model in the Short Run, then targeted practice and FRQs — with the tutor adapting to where you get stuck.
What this lesson covers
In the last few lessons you built the AD-AS model piece by piece. Now it's time to make it move. Topic 3.6 is where the exam expects you to take a real-world event, decide which curve shifts and in which direction, and then read off what happens to real GDP, the price level, and unemployment all at once.
This is one of the most heavily tested skills in Unit 3. FRQs constantly ask you to "draw a correctly labeled AD-AS graph and show the effect of..." some shock. The trick is a disciplined routine: identify the shock, shift the right curve, find the new short-run equilibrium, and translate that into the three headline variables. Get the demand-pull versus cost-push distinction locked in, and you'll pick up easy points.
This is one of the most heavily tested skills in Unit 3. FRQs constantly ask you to "draw a correctly labeled AD-AS graph and show the effect of..." some shock. The trick is a disciplined routine: identify the shock, shift the right curve, find the new short-run equilibrium, and translate that into the three headline variables. Get the demand-pull versus cost-push distinction locked in, and you'll pick up easy points.
The Four Basic Short-Run Shifts
Every short-run change in this model comes from either aggregate demand (AD) or short-run aggregate supply (SRAS) shifting. Long-run aggregate supply (LRAS) does not move in the short run, so ignore it here. There are exactly four scenarios, and each produces a predictable combination of outcomes.
When AD increases (shifts right), the economy moves along SRAS to a higher price level and higher real GDP; since output rose, unemployment falls. When AD decreases (shifts left), price level, real GDP, and employment all fall, so unemployment rises. These AD cases are easy because price level and output move in the same direction.
SRAS shifts are the mirror image. When SRAS increases (shifts right), price level falls but real GDP rises and unemployment falls. When SRAS decreases (shifts left), price level rises while real GDP falls and unemployment rises. Here price level and output move in opposite directions.
Memorizing this table is useful, but understanding why is better: along a fixed SRAS, more demand pushes you up the curve; a shift of SRAS itself slides the whole curve and reverses the price relationship.
When AD increases (shifts right), the economy moves along SRAS to a higher price level and higher real GDP; since output rose, unemployment falls. When AD decreases (shifts left), price level, real GDP, and employment all fall, so unemployment rises. These AD cases are easy because price level and output move in the same direction.
SRAS shifts are the mirror image. When SRAS increases (shifts right), price level falls but real GDP rises and unemployment falls. When SRAS decreases (shifts left), price level rises while real GDP falls and unemployment rises. Here price level and output move in opposite directions.
| Shift | Price Level | Real GDP | Unemployment |
|---|---|---|---|
| AD increases | Up | Up | Down |
| AD decreases | Down | Down | Up |
| SRAS increases | Down | Up | Down |
| SRAS decreases | Up | Down | Up |
What Shifts AD Versus SRAS
To use the model you must correctly diagnose which curve the shock hits. AD is total spending: . Anything that changes consumer spending, investment, government spending, or net exports shifts AD. Common triggers include changes in consumer confidence, interest rates, taxes, government spending, foreign income, and the exchange rate.
SRAS reflects the cost and willingness of firms to produce at each price level. It shifts when production costs or resource conditions change: nominal wages, energy and raw-material prices, business taxes and subsidies, productivity, supply shocks (natural disasters, oil embargoes), and inflationary expectations that push up wage demands.
A classic exam trap: a rise in oil prices. Students sometimes want to shift AD because "prices go up," but higher oil prices raise firms' costs, so SRAS shifts left. Another trap: an increase in government spending is a demand-side change (AD right), not a supply change, even though the government is "producing" something. Ask yourself: does the event change how much buyers want to purchase (AD) or how costly it is for firms to supply (SRAS)? That single question resolves most classification errors.
Also watch direction words. "Subsidy to producers" lowers costs, so SRAS increases. "New business tax" raises costs, so SRAS decreases.
SRAS reflects the cost and willingness of firms to produce at each price level. It shifts when production costs or resource conditions change: nominal wages, energy and raw-material prices, business taxes and subsidies, productivity, supply shocks (natural disasters, oil embargoes), and inflationary expectations that push up wage demands.
A classic exam trap: a rise in oil prices. Students sometimes want to shift AD because "prices go up," but higher oil prices raise firms' costs, so SRAS shifts left. Another trap: an increase in government spending is a demand-side change (AD right), not a supply change, even though the government is "producing" something. Ask yourself: does the event change how much buyers want to purchase (AD) or how costly it is for firms to supply (SRAS)? That single question resolves most classification errors.
Also watch direction words. "Subsidy to producers" lowers costs, so SRAS increases. "New business tax" raises costs, so SRAS decreases.
Demand-Pull Versus Cost-Push Inflation
Inflation means a rising price level, but the AP exam wants you to know its source. The two curves give two distinct inflation stories.
Demand-pull inflation happens when AD increases. Spending outpaces the economy's current output, "pulling" prices up. Because AD shifts right, both the price level and real GDP rise, so unemployment falls. Think of it as "too much money chasing too few goods." It typically accompanies a booming economy.
Cost-push inflation happens when SRAS decreases, usually from a negative supply shock like a spike in input prices. Higher costs "push" the price level up while simultaneously reducing real GDP, so unemployment rises. This produces the uncomfortable combination of rising prices and rising unemployment known as stagflation.
The fastest way to tell them apart on a graph or in words: check what happens to output. If prices and output rise together, it's demand-pull. If prices rise while output falls, it's cost-push. This distinction shows up in both multiple-choice questions and FRQ prompts asking you to identify the type of inflation.
Demand-pull inflation happens when AD increases. Spending outpaces the economy's current output, "pulling" prices up. Because AD shifts right, both the price level and real GDP rise, so unemployment falls. Think of it as "too much money chasing too few goods." It typically accompanies a booming economy.
Cost-push inflation happens when SRAS decreases, usually from a negative supply shock like a spike in input prices. Higher costs "push" the price level up while simultaneously reducing real GDP, so unemployment rises. This produces the uncomfortable combination of rising prices and rising unemployment known as stagflation.
| Feature | Demand-pull | Cost-push |
|---|---|---|
| Curve that shifts | AD right | SRAS left |
| Price level | Rises | Rises |
| Real GDP | Rises | Falls |
| Unemployment | Falls | Rises |
| Nickname | Booming demand | Stagflation |
Reading the Graph and Earning FRQ Points
On the free-response section you will be asked to draw a correctly labeled graph and show a shift. Points are awarded for specific, visible elements, so build the habit now.
A complete graph needs axes labeled "Price Level" (vertical) and "Real GDP" or "Real Output" (horizontal), the AD, SRAS, and often LRAS curves labeled, and the original equilibrium marked. When the shock occurs, draw the new curve with an arrow showing direction, label it or , and mark the new equilibrium price level and output on the axes.
Then translate the graph into words. State the direction of change for real GDP, the price level, and unemployment. Do not just say "the economy changes" — name all three variables. If the prompt gives a starting point (recessionary gap, full employment, inflationary gap), note whether the shock closes or widens the gap.
A common misconception is confusing a movement along a curve with a shift of a curve. Only a change in the price level itself causes a movement along AD or SRAS; every other listed determinant shifts the curve. Also remember that in the short run, wages and other input prices are treated as sticky, which is exactly why SRAS slopes upward and output can deviate from potential.
A complete graph needs axes labeled "Price Level" (vertical) and "Real GDP" or "Real Output" (horizontal), the AD, SRAS, and often LRAS curves labeled, and the original equilibrium marked. When the shock occurs, draw the new curve with an arrow showing direction, label it or , and mark the new equilibrium price level and output on the axes.
Then translate the graph into words. State the direction of change for real GDP, the price level, and unemployment. Do not just say "the economy changes" — name all three variables. If the prompt gives a starting point (recessionary gap, full employment, inflationary gap), note whether the shock closes or widens the gap.
A common misconception is confusing a movement along a curve with a shift of a curve. Only a change in the price level itself causes a movement along AD or SRAS; every other listed determinant shifts the curve. Also remember that in the short run, wages and other input prices are treated as sticky, which is exactly why SRAS slopes upward and output can deviate from potential.
Key terms
- Aggregate Demand (AD).
- Total planned spending on domestic output at each price level, equal to ; shifts with spending determinants.
- Short-Run Aggregate Supply (SRAS).
- Total output firms are willing to produce at each price level when input prices, especially wages, are sticky; slopes upward.
- Demand-pull inflation.
- A rise in the price level caused by an increase in AD, accompanied by higher real GDP and lower unemployment.
- Cost-push inflation.
- A rise in the price level caused by a leftward shift of SRAS (a negative supply shock), accompanied by lower real GDP and higher unemployment.
- Stagflation.
- The simultaneous occurrence of rising prices and rising unemployment, the hallmark of a negative SRAS shift.
- Supply shock.
- A sudden change in production costs or resource availability that shifts SRAS, such as an oil price spike (negative) or a productivity gain (positive).
- Short-run equilibrium.
- The price level and real GDP where AD intersects SRAS; may lie above, below, or at full-employment output.
- Movement along versus shift.
- A change in the price level moves the economy along a curve; a change in any other determinant shifts the whole curve.
Worked example
An economy is initially in short-run equilibrium at full employment. A severe drought sharply raises the prices of agricultural inputs and energy. Predict the short-run effects on the price level, real GDP, and unemployment, and identify the type of inflation. Then state whether AD or SRAS moved.
Step 1: Diagnose the shock. A drought raises input and energy costs for firms. That changes the cost of production, not buyers' willingness to spend, so this is a supply-side event affecting SRAS, not AD.
Step 2: Determine the direction. Higher production costs make firms willing to supply less at every price level, so SRAS shifts left, from to .
Step 3: Find the new equilibrium. With AD unchanged, the leftward SRAS shift slides the intersection up and to the left along AD. The new equilibrium has a higher price level and a lower real GDP than the original full-employment point.
Step 4: Read the three variables. Price level rises. Real GDP falls below potential, opening a recessionary gap. Because output fell, firms hire fewer workers, so unemployment rises.
Step 5: Classify the inflation. Prices rose while output fell — the opposite-direction pattern. This is cost-push inflation, and the combination of rising prices and rising unemployment is stagflation.
Answer: SRAS shifts left; price level up, real GDP down, unemployment up; cost-push inflation (stagflation).
Step 2: Determine the direction. Higher production costs make firms willing to supply less at every price level, so SRAS shifts left, from to .
Step 3: Find the new equilibrium. With AD unchanged, the leftward SRAS shift slides the intersection up and to the left along AD. The new equilibrium has a higher price level and a lower real GDP than the original full-employment point.
Step 4: Read the three variables. Price level rises. Real GDP falls below potential, opening a recessionary gap. Because output fell, firms hire fewer workers, so unemployment rises.
Step 5: Classify the inflation. Prices rose while output fell — the opposite-direction pattern. This is cost-push inflation, and the combination of rising prices and rising unemployment is stagflation.
Answer: SRAS shifts left; price level up, real GDP down, unemployment up; cost-push inflation (stagflation).
Practice questions
A large tax cut increases household disposable income and consumer spending while the economy is producing below full employment. In the short run, what happens to the price level and real GDP?
- Price level rises and real GDP rises
- Price level rises and real GDP falls
- Price level falls and real GDP rises
- Price level falls and real GDP falls
Answer: Price level rises and real GDP rises
A tax cut boosts consumer spending, a component of AD, so AD shifts right. Moving up along SRAS, both the price level and real GDP increase and unemployment falls. Because prices and output rise together, this is demand-pull inflation. The other options describe SRAS shifts or an AD decrease, which don't match a spending-driven increase.
A new government subsidy lowers the cost of energy for domestic manufacturers. Explain, step by step, the short-run effect on the price level, real GDP, and unemployment, and state whether this is demand-pull or cost-push in nature.
Answer: SRAS shifts right; price level falls, real GDP rises, unemployment falls; it is not inflation at all but rather disinflation from a positive supply shock.
The subsidy reduces firms' production costs, so SRAS increases (shifts right). Along a fixed AD, the equilibrium slides down and to the right: the price level falls while real GDP rises, which lowers unemployment. Since prices fall rather than rise, this is neither demand-pull nor cost-push inflation — it is a beneficial positive supply shock. Recognizing that a rightward SRAS shift lowers prices while raising output is the key insight.
During a global recession, incomes fall in the countries that buy a nation's exports. Predict the short-run effects on that nation's price level, real GDP, and unemployment.
Answer: Price level falls, real GDP falls, and unemployment rises.
Lower foreign income reduces demand for the nation's exports, so net exports fall. Net exports are part of AD, so AD shifts left. Moving down along SRAS, the price level and real GDP both decline, and the drop in output raises unemployment. This same-direction movement of prices and output confirms it is an AD-driven change, opening or widening a recessionary gap.
FAQ
- How do I quickly tell demand-pull from cost-push inflation?
- Look at what happens to real GDP. If the price level and real GDP rise together, AD shifted right, so it's demand-pull. If the price level rises while real GDP falls, SRAS shifted left, so it's cost-push (stagflation). Output direction is the giveaway.
- Does an oil price increase shift AD or SRAS?
- SRAS. Oil is an input cost for firms, so a price spike raises production costs and shifts SRAS left, causing cost-push inflation. It is a common trap to shift AD just because prices go up — resist it.
- Why do price level and output move in the same direction for AD shifts but opposite directions for SRAS shifts?
- An AD shift moves the economy along a fixed upward-sloping SRAS, so more demand means both higher prices and more output. An SRAS shift moves the curve itself along a downward-sloping AD, so higher costs raise prices but reduce the quantity of output demanded and produced.
- What do I need to draw for full credit on an AD-AS FRQ?
- Label both axes (Price Level and Real GDP), draw and label AD, SRAS, and usually LRAS, mark the original equilibrium, then show the shift with an arrow and a new labeled curve and new equilibrium. Finally, state the direction of change for the price level, real GDP, and unemployment in words.
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