College Preparatory Program • Saudi Aramco
How Favorable Shocks Affect Aggregate Supply
and the Phillips Curve
Macroeconomic Tips
How Do Favorable Shocks Affect Aggregate Supply
and the Phillips Curve?
FIGURE A.
FIGURE B.
Price Level
AS₁
Inflation Rate
AS₂
P₁
A
A
P₂
B
∙B
AD
PC₁
PC₂
Y₁
Y₂
Output
Unemployment Rate
Key Terms: Favorable Shock, Cost of Production Inputs
Reminder: Phillips Curve shows that there is an inverse relationship between inflation and unemployment.
Examples of Favorable Shocks: (usually result in lowering cost of production inputs)



Improved productivity
Decline in price of oil
Technological Advances
Challenge: Search the Internet or your textbook for real-life examples of the favorable shocks
listed above.
Results:
1.
2.
3.
4.
5.
Aggregate Supply Curve (AD) shifts to the right (AD₁ to AD₂)
Consequently, output is increased (Y₁ to Y₂)
Price level falls (P₁ to P₂)
The economy moves from Point A to Point B in Figure A.
Phillips Curve shifts to the left (PC₁ to PC₂) as Figure B shows.
(As inflation rate drops unemployment rate decreases from point A to point B)