Two Possible Responses to a Supply Shock When the dynamic aggregate demand curve is relatively flat, as in panel (a), a supply shock has a small effect on inflation but a large effect on output. When the dynamic aggregate demand curve is relatively steep, as in panel (b), the same supply shock has a large effect on inflation but a small effect on output. The slope of the dynamic aggregate demand curve is based in part on the parameters of monetary policy (θ_π and θ_Y), which describe how much interest rates respond to changes in inflation and output. When choosing these parameters, the central bank faces a tradeoff between the variability of inflation and the variability of output.