Draw the graph · Macro · Aggregate demand and aggregate supply
The central bank cuts rates
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.
Cheaper borrowing leads households to buy more homes and cars and firms to invest more. Consumption and investment rise at every price level, so AD shifts right. Supply curves do not move.
The price level rises and real GDP rises, opening an inflationary gap.
Common mistake. Students sometimes shift SRAS right because 'firms' borrowing costs fall.' The main channel is more spending on investment and consumption, which is demand.
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Lesson: Monetary Policy Transmission