Draw the graph · Macro · Aggregate demand and aggregate supply
An oil price spike
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 left. Long-run aggregate supply stays put.
Oil is an input for most firms. Higher input costs mean firms will supply any given output only at a higher price level, so SRAS shifts left. Spending plans have not changed, so AD stays put. LRAS is unchanged because the economy's resources and technology are the same.
The price level rises and real GDP falls, opening a recessionary gap with higher inflation.
Common mistake. Students often shift AD left because 'people buy less when oil is expensive.' Buying less at the higher price level is a movement along AD. The shock hit costs, which is SRAS.
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Lesson: Supply Shocks