Draw the graph · Macro · Aggregate demand and aggregate supply
A housing boom
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.
Construction is investment spending and the wealth effect raises consumption. Both are components of aggregate demand, so total spending rises at every price level and AD shifts right. Firms' costs and the economy's capacity are unchanged. Output rises above potential.
The price level rises and real GDP rises, opening an inflationary gap.
Common mistake. Some students shift LRAS right because 'more houses get built.' Potential output depends on resources and technology, not on one year's spending boom. The shift is in AD.
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Lesson: Demand Shocks