Principles of Macroeconomics / Unit 18 MAC 1709 worked example, 60 to 90 seconds
Any Shock: Cause, Curve, Direction, Result
The idea
Trace any macroeconomic event through the model in one fixed order: name the cause, say which curve it touches, say which way that curve moves, and read off what happens to real GDP and to the price level. Saying it in that order is what stops the guessing.
In practice
Energy prices triple worldwide. The cause is an input price. Input prices touch short-run aggregate supply, not aggregate demand. Higher input prices shift short-run supply left. Output falls and the price level rises, which is stagflation. Now a second case: households become far more optimistic and spend more. That touches aggregate demand, which shifts right. Output rises and the price level rises, and how much of each depends on where the economy sits against potential.
Where people slip
The last clause is the part most often dropped. Below potential, a demand increase mostly buys output. At or beyond potential, it mostly buys a higher price level. The zone decides what the shift accomplishes, and a question that tells you where output sits relative to potential is telling you which answer it wants.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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