Figure12-19Short-Run versus Long-Run Effects of Positive Shocks to Both Short-Run and Long-Run Aggregate Supply Starting at E1, a positive productivity shock shifts both SRAS and LRAS rightward to SRAS2 and LRAS2 respectively, and the economy moves to E2 in the short-run. This favourable productivity shock results in an increase aggregate output from Y1 to Y2 and a fall in the aggregate price level from P1 to P2. In the long-run, the SRAS shifts farther to the right to SRAS3 as nominal wages fall in response to the fact that the short-run output is below the new level of potential output, Y3. Aggregate output rises farther to Y3, while the aggregate price level continues to fall until it reaches P3, and the economy self-corrects to its new long-run macroeconomic equilibrium at E3.
An increase in productivity shifts both the short-run and long-run aggregate supply curves to the right. The economy moves from E1 to E2 in the short-run. The aggregate price level falls from P1 to P2, and aggregate output rises from Y1 to Y2.