Graph walkthrough · Macro · Aggregate demand and aggregate supply

Expected inflation moves supply

Workers and firms come to expect higher inflation and build it into wage deals.

Step 1 of 3 · Before expectations change

The economy is at potential output on LRAS. Real GDP is on the horizontal axis and the price level on the vertical. E₀ is the long-run equilibrium.

The chain in words

Step 1
Before expectations change
The economy is at potential output on LRAS. Real GDP is on the horizontal axis and the price level on the vertical. E₀ is the long-run equilibrium.
Step 2
SRAS shifts left
Workers who expect prices to rise demand raises now. Wages rise before any extra demand arrives, so producing any output costs more. SRAS shifts left. The economy moves to E₁: a higher price level and output below potential.
Step 3
A self-fulfilling expectation
Prices rose because people expected them to, and output fell along the way. Getting SRAS back means either an unpleasant wait while unemployment pushes wages down, or a central bank that convinces people inflation will fall.

Takeaway. Higher expected inflation shifts SRAS left, raising the price level and cutting output before any demand changes.

Draw it yourself

This shock: draw the graph Consumer confidence collapses Government sends stimulus checks An oil price spike

More on the aggregate demand and aggregate supply graph

Confidence collapses Stimulus closes a recessionary gap An oil shock brings stagflation A housing boom overheats The central bank cools an overheating economy Technology raises potential output An export boom Austerity cuts demand A stock market crash

Go deeper

Lesson: Aggregate Supply

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.

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