Macroeconomics
Demand shocks can stem from various sources:
● An economic downturn in a major export market can create a negative shock to business investment, particularly in industries reliant on exports. ● Acrashinstockorhomeprices cancauseanegativedemandshockashouseholdsreacttoa loss of wealth by cutting back sharply on consumption spending. ● Supply shocks to essential consumer commodities like food and energy can reduce consumers' real incomes, leading to a demand shock. ● Demand-sideshocksaresometimesreferredtoas"non-technologicalshocks" becausethey are driven by changes in spending patterns rather than technological advancements. Recall that in the short run, there is a trade-off between inflation and unemployment . Therefore, demand shocks affect real GDP, unemployment, and the price level as follows:
Table 2: Impact of Demand Shocks on Macroeconomic Aggregates Demand Shock Impact on Real GDP Impact on Unemployment Rate
Impact on Price Level
Positive: ↑AD
↑RGDP
↓UR
↑PL
Negative: ↓AD
↓RGDP
↑UR
↓PL
This allows us to conclude that inflation can be causedby changes in aggregate demand (demand-pull inflation whereby an increase in AD raises the price level).
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