Short Run Adjustment

Here is a diagram to illustrate the short-run adjustment of the economy to the reduction in autonomous consumption. The long-run aggregate supply (NAIRGDP) is again shown in dark red, labeled "LAS," and the short-run aggregate supply is shown in lighter red, labeled "SAS₁." Aggregate Demand before the reduction in consumption is shown by the darker green curve labeled "AD₁." Before the decrease in consumption, equilibrium is shown by the upper orange line and the price level "p₁," with production at the NAIRGDP.

Figure 3: A Decrease in Aggregate Supply in the Short Run

After the decrease in consumption, Aggregate Demand is shown by the lighter green curve labeled "AD₂." The leftward shift is the result of the drop in autonomous consumption and the horizontal distance between the two curves is the multiplier times the cut in autonomous consumption. The new equilibrium is shown by the two orange lines at price level "p₂," and production at Y, below the NAIRGDP.

Long Run Adjustment Copyright