Graph walkthrough · Macro · Aggregate demand and aggregate supply

An export boom

A trading partner's economy booms and its consumers buy far more of this country's exports.

Step 1 of 4 · Before the boom abroad

The economy starts at potential output. Real GDP is on the horizontal axis and the price level on the vertical. E₀ is on LRAS.

The chain in words

Step 1
Before the boom abroad
The economy starts at potential output. Real GDP is on the horizontal axis and the price level on the vertical. E₀ is on LRAS.
Step 2
Aggregate demand shifts right
Exports are part of aggregate demand. Foreign orders rise at every price level, so aggregate demand shifts right. Exporters and their suppliers raise output and prices. The economy moves to E₁: output above potential and a higher price level.
Step 3
Wages rise, SRAS shifts left
Firms compete for scarce workers and wages rise. Higher costs shift SRAS left, and the economy climbs to E₂ on LRAS.
Step 4
The long run
In the long run the export boom leaves output back at potential with a higher price level. The gain in output was temporary.

Takeaway. A rise in net exports shifts AD right, raising output and prices in the short run, and only prices in the long run.

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 Expected inflation moves supply Austerity cuts demand A stock market crash

Go deeper

Lesson: Aggregate Demand

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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