You first have to see the figure, so let us describe it precisely. Horizontal axis: the country's output, Y, in billions of euros. Vertical axis: the general price level, P, an index worth 100 at the start. AGGREGATE DEMAND is a curve that SLOPES DOWN from left to right: the higher prices are, the less is bought (assumption 2). Short-run AGGREGATE SUPPLY SLOPES UP from left to right: the higher prices are, the more profitable it is to produce (assumption 3). Two curves with opposite slopes cross at one point and one only: that point gives both the country's price and its output. The whole course consists in moving one or the other and re-reading that point.

Let us put numbers on it. Demand: Y = A − β(P − 100), where A is the level of demand when prices are at 100, and β measures how much demand recedes when prices rise by one point — take β = 8, that is, €8 billion less per index point. Short-run supply: Y = Ȳ + α(P − Pᵉ) − c, where Ȳ = €2,800 billion is potential GDP, Pᵉ the price EXPECTED when contracts were signed, α = 8 the response of firms to a price surprise, and c the extra cost imposed by a supply shock (c = 0 when all is calm). That second equation IS the supply curve: it slopes up because α is positive, and if expectations are always right (Pᵉ = P), what remains is Y = Ȳ — the long-run vertical. So both halves of assumption 3 can be read straight off the algebra.

The meeting point is obtained by writing that the two quantities are equal: A − β(P − 100) = Ȳ + α(P − Pᵉ) − c. At the start, take A = 2,800 (demand is exactly equal to potential), Pᵉ = 100 and c = 0. The equality becomes 2,800 − 8(P − 100) = 2,800 + 8(P − 100), so 8(P−100) = −8(P−100), which is possible only if P = 100; and then Y = 2,800. There is the starting equilibrium: price 100, output 2,800, exactly at potential. Nothing was imposed — the price CAME OUT of the computation, and that is what “equilibrium” means.

Let us now do the algebra once and for all, with a demand shock ΔA (A becomes 2,800 + ΔA) and a supply shock c. Solving, the new equilibrium reads: P* = 100 + (ΔA + c)/(α+β) and Y* = Ȳ + (α·ΔA − β·c)/(α+β). Look at the SIGNS, they are the whole course. In the price, ΔA and c both enter with a PLUS: demand up or costs up, prices rise in both cases. In output, ΔA enters with a plus and c with a MINUS. Conclusion: **a demand shock pushes P and Y the same way; a supply shock pushes them opposite ways**. One rule, four cases deduced — and stagflation stops being a mystery: it is simply the line “c positive”. On the figure it shows just as clearly as in the algebra, and here is the vocabulary that goes with it. A positive ΔA moves the DEMAND curve to the RIGHT: at every price level, the country wants to buy more. The equilibrium then slides ALONG the supply curve, which slopes up — hence price and output rising together. A positive extra cost c moves the SUPPLY curve to the LEFT: at every price level, firms produce less. This time the equilibrium slides along the demand curve, which slopes down — hence a price that rises while output falls. The rule of signs and the drawing say exactly the same thing. Click each term: