An event that shifts the aggregate demand curve, such as a change in expectations or wealth, the effect of the size of the existing stock of physical capital, or the use of fiscal or monetary policy, is known as a demand shock. The Great Depression was caused by a negative demand shock, the collapse of wealth and of business and consumer confidence that followed the stock market crash of 1929 and the banking crisis of 1930–1931.

The Depression was ended by a positive demand shock—the huge increase in government purchases during World War II. In 2008 the U.S. economy experienced another significant negative demand shock as the housing market turned from boom to bust, leading consumers and firms to scale back their spending.

Figure 12-12 shows the short-run effects of negative and positive demand shocks. A negative demand shock shifts the aggregate demand curve, AD, to the left, from AD₁ to AD₂, as shown in panel (a). The economy moves down along the SRAS curve from E₁ to E₂, leading to lower short-run equilibrium aggregate output and a lower short-run equilibrium aggregate price level. A positive demand shock shifts the aggregate demand curve, AD, to the right, as shown in panel (b). Here, the economy moves up along the SRAS curve, from E₁ to E₂. This leads to higher short-run equilibrium aggregate output and a higher short-run equilibrium aggregate price level. Demand shocks cause aggregate output and the aggregate price level to move in the same direction.