Principles of Macroeconomics / Unit 8 MAC 0719 worked example, 60 to 90 seconds
Reading the Result
The idea
Once you know which curve moved and which way, the outcome follows in a fixed pattern worth memorising. Demand right raises both real GDP and the price level. Demand left lowers both. Supply right raises real GDP and lowers the price level. Supply left lowers real GDP and raises the price level. Notice the pattern: when demand moves, output and prices go the same way; when supply moves, they go opposite ways.
In practice
Worked example: a rise in consumer confidence shifts demand right, so output and prices both rise. A harvest failure raising food costs shifts supply left, so output falls while prices rise. A productivity gain shifts supply right, so output rises while prices fall. A collapse in export markets shifts demand left, so output and prices both fall.
Where people slip
That pattern is also the diagnosis running backwards. If you are told only that output fell and prices rose, supply must have moved left, because no demand shift produces that pair. This is how unit six's two kinds of inflation are told apart.
Your place on the trail
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