Trace an adverse supply shock through AD–AS
Three steps, the way the exam actually works: work through the lab, write down your own measurements, then answer a 6-point free response. What you recorded goes to the grader with your writing, so a conclusion that does not follow from your own numbers will cost you the point — exactly as it would with a real reader.
Predict before you look
- An aggregate demand shift moves output and the price level in the same direction. What does a supply shift do to those two variables?
- Which curve represents potential output, and does a supply shock to costs move it?
Nothing to submit here — these are to think through, so the prediction below is an informed one rather than a guess.
Commit to an answer now. It is not graded and being wrong costs nothing — the point is to have something specific to reconcile against once you have the data.
Answer every prediction to unlock the lab. A sentence is enough.
Run the investigation
Predictions first
The procedure and the simulation unlock once you have committed above. Observing before predicting is how a wrong intuition survives a lab intact.
Record what you measured
These are your numbers, not ours. The grader sees them, so your conclusions have to follow from what you actually recorded.
| Real GDP (Y*) before the shock | |
|---|---|
| Price level (P*) before the shock | |
| Unemployment before the shock | % |
| Real GDP (Y*) after the shock | |
| Price level (P*) after the shock | |
| Unemployment after the shock | % |
Answer the free response
An economy starting at full employment is hit by an adverse supply shock. (a) Describe what happened to real output and to the price level, citing your before-and-after values, and name the macroeconomic condition that those two movements together define. (b) Explain why an adverse supply shock moves output and the price level in OPPOSITE directions, and contrast that with what a decrease in aggregate demand would do. (c) Your unemployment reading changed. Explain the relationship between the output gap and cyclical unemployment that produces that change. (d) A policymaker proposes expansionary monetary policy in response. Explain the trade-off involved and state what would happen to the price level.
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