Social Sciences and History / Unit 15 SSH 1410 worked example, 60 to 90 seconds
Which Curve Shifts, and What Happens
The idea
The exam describes a macroeconomic event and asks what happens to output and the price level, and the anchor's model answers in three steps. First, which curve: aggregate demand shifts when its components move, consumption, investment, government spending, exports minus imports, through confidence or policy; aggregate supply shifts when productivity changes or the price of key inputs changes. Second, which way: more spending, higher productivity or cheaper inputs shift right; less spending or costlier inputs shift left. Third, the result: AD right raises output and the price level, AD left lowers both; AS right raises output and lowers the price level, AS left lowers output and raises the price level, stagflation. How much output moves against price depends on where AD meets AS, flat or steep.
In practice
Given "consumer confidence collapses", AD left: output down, prices down, recession. Given "a new technology raises productivity", AS right: output up, prices down. Given "oil prices double", AS left: output down, prices up. Given "government spending rises", AD right: output up, prices up. Ask whether the event touches spending or the cost of producing.
Where people slip
The trap is the diagram's resemblance to micro supply and demand; the axes are price level and real GDP and the reasons for the slopes differ. The second trap is the trade balance, which enters indirectly, exports and imports through AD and imported inputs through AS.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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