AD-AS Model drawing worksheet
The answer key prints on its own page, so hand out everything before it.
AD-AS Model drawing worksheet · problem 1 of 4
Assume the economy of Alta is initially in long-run equilibrium. In response to political pressure, the government of Alta significantly increases its purchases of goods and services, financed by borrowing. Show the short-run effect of this policy on Alta's economy, assuming the central bank takes no action.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
AD-AS Model drawing worksheet · problem 2 of 4
Assume the economy of Beltran is initially in long-run equilibrium. A wave of pessimistic economic forecasts leads households to sharply cut back on spending and increase saving. Show the short-run effect on Beltran's economy, holding all else constant.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
AD-AS Model drawing worksheet · problem 3 of 4
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.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
AD-AS Model drawing worksheet · problem 4 of 4
Assume the economy of Dorane is initially in long-run equilibrium. A record worldwide harvest causes the prices of raw agricultural inputs used by firms throughout Dorane to fall sharply. Show only the short-run effect on Dorane's economy, holding all else constant.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
AD-AS Model drawing worksheet: answer key
1. Expansionary Fiscal Policy: ad shifts right
Government purchases are a component of aggregate demand. When the government of Alta buys more goods and services, total spending in the economy rises at every price level, shifting aggregate demand to the right. Firms' production costs and the economy's productive capacity are unchanged, so neither the short-run nor the long-run aggregate supply curve shifts.
The equilibrium price level rises and real GDP increases above full-employment output in the short run.
Watch for: Many students also shift LRAS right, reasoning that government spending on roads and buildings adds to the nation's capacity. LRAS moves only when the quantity of resources or the level of technology changes, and a one-year increase in purchases changes neither, so the extra output here is a temporary gap above potential rather than a higher potential.
2. Consumer Confidence Shock: ad shifts left
Falling consumer confidence reduces consumption, the largest component of aggregate demand. Total spending falls at every price level, shifting aggregate demand to the left. Because input costs, resources, and technology are unaffected, the short-run and long-run aggregate supply curves do not shift.
The equilibrium price level falls and real GDP declines below full-employment output, creating a recessionary gap.
Watch for: Students commonly add a leftward SRAS shift because they associate a downturn with struggling firms. Firms do produce less, but that is a movement along an unchanged SRAS caused by weaker spending; nothing has changed what it costs a firm to make one unit of output.
3. Oil Price Shock: 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.
The equilibrium price level rises while real GDP falls below full-employment output, producing stagflation.
Watch for: 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.
4. Cheaper Inputs: sras shifts right
Lower input prices reduce firms' per-unit production costs, so at every price level firms are willing to produce more output. This shifts short-run aggregate supply to the right. The economy's resource base and technology have not changed, so long-run aggregate supply does not move, and no spending component is directly affected, so aggregate demand stays put.
The equilibrium price level falls and real GDP rises above full-employment output in the short run.
Watch for: A frequent wrong answer is shifting AD right, on the logic that cheaper goods let consumers buy more. Consumers do buy more, but that is a movement along an unchanged AD in response to the lower price level, and a shift of AD would push the price level up rather than down.