Draw the graph · Macro · Aggregate demand and aggregate supply
Consumer confidence collapses
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 left. Short-run aggregate supply stays put. Long-run aggregate supply stays put.
Consumer spending is the largest part of aggregate demand. When households spend less at every price level, the whole AD curve shifts left. Firms' costs and the economy's capacity to produce have not changed, so SRAS and LRAS stay put. Output falls below potential.
The price level falls and real GDP falls, opening a recessionary gap.
Common mistake. Some students shift SRAS left because 'firms produce less.' Firms produce less because buyers are spending less, a movement along SRAS. The shock came from demand.
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Lesson: Demand Shocks