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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