How do shocks to aggregate demand and short-run aggregate supply change output and the price level?
Topic 3.6 Changes in the AD-AS Model in the Short Run: trace how shifts in aggregate demand or short-run aggregate supply change the price level, real output, and unemployment in the short run.
A focused answer to AP Macroeconomics Topic 3.6, covering demand shocks and supply shocks in the short run, their effects on the price level, real output, and unemployment, and how to read the resulting output gaps, with a worked graphing question.
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What this topic is asking
Topic 3.6 puts the AD-AS model to work. Starting from equilibrium, you trace how a demand shock or a supply shock changes the price level, real output, and unemployment in the short run, and which output gap opens. This is the core mechanism behind every Unit 3 free-response question.
Demand shocks
Supply shocks
Reading these signatures the other way round is a powerful exam tool: if a question says prices and output both rose, the cause was a demand shock; if prices rose while output fell, the cause was a negative supply shock. The same logic identifies the missing piece in a free-response prompt: given any two of the three (the cause, the change in output, the change in the price level), you can deduce the third. A demand shock and a supply shock can also occur together; when they do, you trace each shift in turn and combine the effects, noting that the net change in output or the price level may be ambiguous if the two shifts pull the same variable in opposite directions.
Try this
Q1. A negative supply shock hits the economy. What happens to output and the price level? [2 points]
- Cue. Output falls and the price level rises (stagflation).
Q2. Prices and real output both fell. Was the cause a demand shock or a supply shock, and which direction? [2 points]
- Cue. A negative (leftward) demand shock; demand shocks move output and prices the same way.
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2020 (style)1 marksMultiple choice. Starting from long-run equilibrium, a sudden fall in business investment will, in the short run, cause real output to ____ and the price level to ____. (A) rise; rise (B) fall; fall (C) rise; fall (D) fall; rise (E) stay the same; fallShow worked answer →
The answer is (B). A fall in investment reduces a component of aggregate demand, shifting AD left. Along the upward-sloping SRAS, a leftward AD shift lowers both real output and the price level, opening a recessionary gap.
(A) describes a rightward AD shift. (C) and (D) describe supply shocks. (E) ignores the effect on output. A negative demand shock lowers output and prices, so (B) is correct.
AP 2021 (style)5 marksFree response. An economy begins in long-run equilibrium. (a) Draw a correctly labelled AD-AS graph showing this starting point with AD, SRAS, and LRAS. (b) A severe drought sharply raises food and input prices. Show the short-run effect on the graph. (c) State what happens to real output and the price level. (d) Identify the type of output gap that opens. (e) Explain why this outcome is difficult for policymakers.Show worked answer →
A 5-point graphing FRQ.
(a) Graph (1 point): vertical LRAS at ; AD, , and LRAS all meeting at (, ).
(b) Shift (1 point): the drought raises input costs, shifting SRAS left from to .
(c) Output and prices (1 point): real output falls (to ) and the price level rises (to ).
(d) Gap (1 point): a recessionary gap opens (output is below full-employment output).
(e) Difficulty (1 point): this is stagflation; using expansionary policy to raise output would push the price level even higher, while fighting inflation would deepen the recession, so the two goals conflict.
Markers reward a leftward SRAS shift, falling output with a rising price level, the recessionary gap, and the policy-conflict reasoning.
Related dot points
- Topic 3.5 Equilibrium in the AD-AS Model: locate short-run and long-run macroeconomic equilibrium, and identify recessionary and inflationary output gaps.
A focused answer to AP Macroeconomics Topic 3.5, covering short-run and long-run macroeconomic equilibrium, the relationship between short-run equilibrium and full-employment output, and how to identify recessionary and inflationary output gaps on the AD-AS graph, with a worked question.
- Topic 3.1 Aggregate Demand: define aggregate demand, explain the wealth, interest-rate, and exchange-rate effects that make it downward sloping, and identify the determinants that shift it.
A focused answer to AP Macroeconomics Topic 3.1, covering the definition of aggregate demand, the three reasons it slopes downward (the wealth, interest-rate, and exchange-rate effects), the components C plus I plus G plus net exports, and the determinants that shift the curve, with a worked graphing question.
- Topic 3.3 Short-Run Aggregate Supply: explain why the short-run aggregate supply curve slopes upward using sticky wages and prices, and identify the determinants that shift it.
A focused answer to AP Macroeconomics Topic 3.3, covering the upward slope of short-run aggregate supply, sticky wages and prices and misperceptions, supply shocks, and the determinants that shift SRAS, with a worked graphing question.
- Topic 3.7 Long-Run Self-Adjustment: explain how flexible wages and prices return the economy to full-employment output after a demand or supply shock, with no policy intervention.
A focused answer to AP Macroeconomics Topic 3.7, covering how the economy self-corrects from recessionary and inflationary gaps through flexible wages shifting short-run aggregate supply, the classical view, and the trade-off with active policy, with a worked graphing question.
- Topic 3.8 Fiscal Policy: explain how expansionary and contractionary fiscal policy use government spending and taxes, with the multiplier, to close recessionary and inflationary output gaps.
A focused answer to AP Macroeconomics Topic 3.8, covering discretionary fiscal policy, expansionary and contractionary tools, using the spending and tax multipliers to size the policy needed to close an output gap, and the lags of fiscal policy, with full worked calculations.
Sources & how we know this
- AP Macroeconomics Course and Exam Description — College Board (2023)