3.6 Changes in the AD–AS Model in the Short Run

Q: How do Price Level and Real GDP move in relation to each other during an Aggregate Demand shift?

During an AD shift, Price Level and Real GDP move in the same direction .

Q: How do Price Level and Real GDP move in relation to each other during a Short-Run Aggregate Supply (SRAS) shift?

During an SRAS shift, Price Level and Real GDP move in opposite directions .

Q: What is the relationship between Real GDP and the Unemployment Rate (\( UR \)) in the short run?

Real GDP and Unemployment have an inverse relationship ; when Real GDP increases, Unemployment decreases, and vice versa.

AP Macroeconomics · AP (Advanced Placement) · 6 min read · Updated: Sep 7, 2026

Introduction to Changes in the AD–AS Model

Welcome to the "action" phase of Unit 3! Until now, you have learned what Aggregate Demand (AD) and Aggregate Supply (AS) are in isolation. Now, we are going to put them together to see how the economy reacts when something "shocks" the system. Think of the AD–AS model as a snapshot of a country's economic health. By shifting these curves, we can predict whether a country is headed for a boom, a recession, or the dreaded "stagflation." Don't worry if it seems like a lot of moving parts—we will break it down step-by-step.

Note: This chapter focuses on the Short Run. While we use the Long-Run Aggregate Supply (LRAS) curve as a "goalpost" to see where the economy should be, we are looking at the immediate effects of shifts before the economy has time to self-adjust (which you will learn about in Topic 3.7).

The Three Possible States of the Economy

Before we shift anything, we need to know where the economy stands relative to its full-potential output (\( Y_{fe} \)). There are three main scenarios you will see on the AP Exam:

Full Employment Equilibrium: The \( AD \) and \( SRAS \) curves intersect exactly on the vertical \( LRAS \) line. The economy is "just right."
Recessionary Gap (Negative Output Gap): The current equilibrium (\( AD \) and \( SRAS \)) is to the left of the \( LRAS \). The economy is producing less than its potential, and unemployment is higher than the natural rate.
Inflationary Gap (Positive Output Gap): The current equilibrium is to the right of the \( LRAS \). The economy is "overheating," producing more than its sustainable potential, and unemployment is lower than the natural rate.

Key Takeaway: The \( LRAS \) represents full employment. If the intersection of \( AD \) and \( SRAS \) is not on that line, the economy is experiencing a "gap."

Scenario 1: Aggregate Demand (AD) Shocks

An Aggregate Demand shock occurs when one of the components of spending (\( C + I + G + Xn \)) changes suddenly.

Positive AD Shock (Increase in AD)

Example: Consumer confidence rises, or the government increases spending (\( G \)).

The Shift: The \( AD \) curve shifts to the right.
Effect on Price Level (\( PL \)): Increases (Inflation).
Effect on Real GDP (\( Y \)): Increases.
Effect on Unemployment (\( UR \)): Decreases (because firms need more workers to produce the extra output).
Result: An Inflationary Gap.

Negative AD Shock (Decrease in AD)

Example: A stock market crash causes consumers to cut back on spending (\( C \)).

The Shift: The \( AD \) curve shifts to the left.
Effect on Price Level (\( PL \)): Decreases (Deflation or slowing inflation).
Effect on Real GDP (\( Y \)): Decreases.
Effect on Unemployment (\( UR \)): Increases (as production falls, workers are laid off).
Result: A Recessionary Gap.

Quick Trick: For \( AD \) shifts, Price Level and Real GDP move in the same direction. If \( AD \) goes up, both \( PL \) and \( Y \) go up!

Scenario 2: Short-Run Aggregate Supply (SRAS) Shocks

A Supply shock occurs when production costs or resource availability change suddenly across the whole economy.

Positive Supply Shock (Increase in SRAS)

Example: A sudden drop in the price of oil or a major technological breakthrough.

The Shift: The \( SRAS \) curve shifts to the right.
Effect on Price Level (\( PL \)): Decreases.
Effect on Real GDP (\( Y \)): Increases.
Effect on Unemployment (\( UR \)): Decreases.
Result: Economic growth with lower prices—often called the "Goldilocks" scenario!

Negative Supply Shock (Decrease in SRAS)

Example: A massive increase in the price of electricity or a widespread natural disaster.

The Shift: The \( SRAS \) curve shifts to the left.
Effect on Price Level (\( PL \)): Increases.
Effect on Real GDP (\( Y \)): Decreases.
Effect on Unemployment (\( UR \)): Increases.
Result: Stagflation.

Did you know?

Stagflation is a combination of the words "Stagnation" (falling GDP and high unemployment) and "Inflation" (rising prices). It is the worst of both worlds and is very difficult for policymakers to fix!

Key Takeaway: For \( SRAS \) shifts, Price Level and Real GDP move in opposite directions. If \( SRAS \) shifts left, \( PL \) goes up while \( Y \) goes down.

Step-by-Step: How to Graph a Change

When you are asked to demonstrate the effect of a change on a graph for the AP Exam, follow these steps to ensure you get full points:

Draw the starting point: Label the vertical axis Price Level (\( PL \)) and the horizontal axis Real GDP (\( Y \)). Draw \( AD \), \( SRAS \), and \( LRAS \). Start at full employment unless the question says otherwise.
Identify the shifter: Ask yourself, "Is this a change in spending (\( AD \)) or a change in production costs (\( SRAS \))?"
Shift the curve: Draw the new curve and an arrow showing the direction of the shift (e.g., \( AD_1 \) to \( AD_2 \)).
Identify the new equilibrium: Find where the new curve intersects the unchanged short-run curve.
Compare variables: Use dotted lines to show the new Price Level (\( PL_2 \)) and new Real GDP (\( Y_2 \)) on the axes.

Common Mistakes to Avoid

Confusing "Demand" with "Quantity Demanded": Only a shift in the curve changes the "Aggregate Demand." A movement along the curve is just a response to a price change.
The Unemployment Trap: Many students forget that Real GDP and Unemployment move in opposite directions. If your graph shows Real GDP (\( Y \)) decreasing, you must state that Unemployment (\( UR \)) is increasing.
Labeling Axes: Never label the axes "Price" and "Quantity." In Macroeconomics, it must be Price Level and Real GDP (or \( Y \)).
Ignoring the LRAS: Even though we are looking at the short run, the \( LRAS \) must be on your graph to show whether the new equilibrium represents a recessionary or inflationary gap.

Summary of Short-Run Effects

Use this table as a quick reference guide for your studies:

Event	Shift	Price Level (\( PL \))	Real GDP (\( Y \))	Unemployment (\( UR \))
Increase in \( AD \)	\( AD \) Right	Increase	Increase	Decrease
Decrease in \( AD \)	\( AD \) Left	Decrease	Decrease	Increase
Increase in \( SRAS \)	\( SRAS \) Right	Decrease	Increase	Decrease
Decrease in \( SRAS \)	\( SRAS \) Left	Increase	Decrease	Increase

Ready for the next step? In Topic 3.7, we will look at how the economy eventually fixes these gaps on its own through "Long-Run Self-Adjustment."

Quick check

Can you answer these now?

Open each question to check the key ideas from this chapter.

What are the three main states of the economy relative to full-potential output in the AD–AS model?

The three states are Full Employment Equilibrium, a Recessionary Gap (Negative Output Gap), and an Inflationary Gap (Positive Output Gap).

What happens to the Price Level and Real GDP when there is a positive Aggregate Demand (AD) shock?

Both the Price Level (\( PL \)) and Real GDP (\( Y \)) increase, while unemployment decreases, creating an inflationary gap.

What are the short-run effects of a negative Aggregate Demand (AD) shock?

The Price Level (\( PL \)) and Real GDP (\( Y \)) both decrease, while unemployment increases, resulting in a recessionary gap.

How do Price Level and Real GDP move in relation to each other during an Aggregate Demand shift?

During an AD shift, Price Level and Real GDP move in the same direction.

What is the result of a positive Short-Run Aggregate Supply (SRAS) shock on the economy?

The Price Level decreases, Real GDP increases, and unemployment decreases.

What is stagflation, and what causes it in the AD–AS model?

Stagflation is the combination of rising prices and falling output caused by a negative SRAS shock (leftward shift of SRAS).

How do Price Level and Real GDP move in relation to each other during a Short-Run Aggregate Supply (SRAS) shift?

During an SRAS shift, Price Level and Real GDP move in opposite directions.

What is the relationship between Real GDP and the Unemployment Rate (\( UR \)) in the short run?

Real GDP and Unemployment have an inverse relationship; when Real GDP increases, Unemployment decreases, and vice versa.

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