Draw the graph · Macro · Aggregate demand and aggregate supply
Businesses turn optimistic
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Aggregate demand shifts right. Short-run aggregate supply stays put. Long-run aggregate supply stays put.
Purchases of machines and plants are investment spending, a component of aggregate demand. When firms invest more at every price level, AD shifts right. The new capital will raise capacity later, but this year the effect is more spending.
The price level rises and real GDP rises, opening an inflationary gap.
Common mistake. Students sometimes shift LRAS right because 'new plants raise capacity.' Until the plants are running, the effect is the spending to build them. The exam answer is a rightward shift of AD.
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Lesson: Aggregate Demand