Economic Fluctuations: AD / AS Shocks

The aggregate demand–supply model

In the short run prices are sticky, so shocks move real output. In the long run prices adjust and output returns to its natural level. Three curves:

  • AD (aggregate demand): from \(M\cdot V = P\cdot Y\), so \(Y = \dfrac{M V}{P}\) — slopes down. Shifts right/left when M or V changes (a demand shock).
  • LRAS (long-run supply): vertical at natural output \(Y^*\) — output is pinned by K, L, technology, independent of prices.
  • SRAS (short-run supply): horizontal at the current (sticky) price level. A supply shock (oil, a bumper crop) shifts it up/down.

How shocks play out

  • Demand shock (move AD): short run → output moves along the flat SRAS (price sticks); long run → SRAS adjusts, output returns to \(Y^*\), only the price level changes. The Fed can fully offset it.
  • Supply shock (shift SRAS): short run → output and prices move in opposite directions (adverse = stagflation); long run → the economy self-corrects back to \(Y^*\).

Try it. Move aggregate demand or hit a supply shock, then toggle Short run ↔︎ Long run to watch the economy adjust back to natural output. Loads instantly — plain JavaScript, no downloads.

What to notice

  • Demand shock: move M·V only (leave supply at 0). In the short run output swings (boom/recession) while the price sticks. Flip to Long run — output snaps back to natural and only the price level has moved. That’s money neutrality, delayed.
  • Supply shock: slide Supply shock to adverse (+). In the short run output falls and prices rise together — stagflation. Flip to Long run — the economy self-corrects back to natural output and the shock unwinds.
  • The asymmetry: a demand shock can be fully offset by moving M·V back; a supply shock forces a choice between output and prices. Toggling short/long run shows why the two shocks feel so different.