Place your mouse cursor over the AD label to drag the Aggregate Demand curve inward or outward to replicate a demand-side shock.
You may drag on the magenta Triangle to alter the Long Run Aggregate Supply (LRAS) position or on the
green Triangle to alter the Short Run Aggregate Supply (SRAS) lines.
Press the Self Correcting Equilibrium button or the Monetary Policy Adjustment button to see the appropriate adjustment(s).
Press Reset to start over.
Questions:
Suppose the economy suffers from a positive inflation shock, such as a rise in the cost of energy or other raw materials to firms. Show the impact of this shock on the short-run aggregate supply curve (SRAS) in the graph. What happens to the equilibrium level of output and inflation in the short run?
Describe the process by which the economy will return to long run equilibrium, if left to its own devices.
Hit reset and show the impact again on the SRAS of a positive inflation shock. Is there any way that the Federal Reserve can shift its monetary policy reaction curve to return the economy to its original long-run equilibrium position?
When the economy is hit by a supply shock, both output and inflation are affected. What determines the size of the impact of a given inflation shock on output?
Hit reset to return the graph to its original equilibrium position. Show what would happen to the economy if a rise in productivity led to an increase in potential output. What happens to the short-run equilibrium point in the economy?
If policymakers decide to reduce their inflation target and not to take any policy action to maintain their current target, how does the economy reach its new long-run equilibrium position?
If policymakers decide to take action to maintain their original inflation target, how will the economy reach long-run equilibrium?
