Draw the graph · Macro · Aggregate demand and aggregate supply
Energy prices fall
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 stays put. Short-run aggregate supply shifts right. Long-run aggregate supply stays put.
Energy is an input for most firms. Lower input costs mean firms will supply any given output at a lower price level, so SRAS shifts right. AD is unchanged. LRAS does not move because the economy's resources and technology are the same.
The price level falls and real GDP rises, opening an inflationary gap.
Common mistake. Students often shift AD right because 'cheaper energy leaves households more to spend.' The stem holds spending plans fixed. The direct effect is on firms' costs, which is SRAS.
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