Oil Price Shock
The question
Assume the economy of Corvia is initially in long-run equilibrium. A conflict abroad causes the world price of oil, a key input for producers throughout Corvia, to double. Show only the short-run effect on Corvia's economy, holding all else constant. Show the effect on the AD-AS Model graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Oil Price Shock: the worked answer
On the AD-AS Model graph, SRAS shifts left.
Why SRAS shifts left
Higher oil prices raise per-unit production costs for firms across the economy, so at every price level firms are willing to supply less output. This shifts short-run aggregate supply to the left. The economy's quantity of resources and its technology are unchanged, so long-run aggregate supply stays put, and the shock does not directly change total spending, so aggregate demand does not shift.
What happens to the equilibrium
The equilibrium price level rises while real GDP falls below full-employment output, producing stagflation.
The mistake students make on this one
Many students shift AD left instead, reasoning that expensive fuel leaves households with less to spend. The shock enters through firms' per-unit costs, not through spending plans, and the AD answer predicts a falling price level, which is the opposite of the inflation the scenario actually produces.
On exam day
Stagflation is the fingerprint of a leftward SRAS shift. If your drawing has the price level and real GDP moving in the same direction, you shifted a demand curve when the stem described a cost shock.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when SRAS shifts left and every other curve on the AD-AS Model graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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