Macroeconomics

‭●‬ ‭Demand‬‭Shocks:‬ ‭Demand‬‭shocks‬‭are‬‭sudden‬‭and‬‭unforeseen‬‭changes‬‭in‬‭the‬‭demand‬‭for‬‭goods‬ ‭and‬ ‭services‬ ‭in‬ ‭an‬ ‭economy.‬ ‭These‬ ‭shocks‬ ‭can‬ ‭lead‬‭to‬‭situations‬‭like‬‭inflationary‬‭gaps‬‭(where‬ ‭demand‬ ‭exceeds‬ ‭supply)‬ ‭or‬ ‭recessionary‬ ‭gaps‬ ‭(where‬ ‭supply‬ ‭exceeds‬ ‭demand).‬ ‭In‬ ‭this‬ ‭case,‬ ‭there‬ ‭is‬ ‭an‬ ‭inflationary‬ ‭gap‬ ‭(shift‬ ‭from‬ ‭AD₁‬ ‭to‬ ‭AD₂)‬ ‭that‬ ‭moves‬ ‭the‬‭short-run‬‭equilibrium‬‭from‬ ‭point A to point B.‬ ‭●‬ ‭Long-Run‬ ‭Self-Adjustment:‬ ‭In‬ ‭a‬ ‭market‬ ‭economy‬ ‭with‬ ‭no‬ ‭government‬ ‭intervention,‬ ‭the‬ ‭long-run‬ ‭self-adjustment‬ ‭mechanism‬ ‭comes‬ ‭into‬ ‭play‬ ‭to‬ ‭correct‬ ‭imbalances‬ ‭caused‬ ‭by‬ ‭demand‬ ‭shocks‬ ‭.‬ ‭Specifcally,‬ ‭it‬ ‭operates‬ ‭to‬ ‭eliminate‬ ‭inflationary‬ ‭gaps‬ ‭where‬ ‭demand‬ ‭is‬ ‭excessive.‬ ‭●‬ ‭Market‬ ‭Response:‬ ‭In‬ ‭the‬ ‭long‬ ‭run,‬ ‭markets‬ ‭react‬ ‭to‬ ‭an‬ ‭inflationary‬ ‭gap‬ ‭by‬‭increasing‬‭wages‬ ‭(remember‬‭that‬‭in‬‭the‬‭long‬‭run‬‭all‬‭prices‬‭are‬‭flexible).‬‭This‬‭is‬‭a‬‭key‬‭element‬‭of‬‭the‬‭self-correction‬ ‭process.‬‭When‬‭demand‬‭is‬‭high,‬ ‭businesses‬‭may‬‭pay‬‭higher‬‭wages‬‭to‬‭attract‬‭more‬‭workers‬‭to‬ ‭meet the increased demand‬ ‭for goods and services.‬ ‭●‬ ‭Shift‬ ‭of‬‭SRAS‬‭Curve:‬‭As‬‭wages‬‭rise,‬‭production‬‭costs‬‭increase‬ ‭,‬‭and‬‭businesses‬‭become‬‭less‬ ‭willing‬ ‭to‬ ‭supply‬ ‭goods‬ ‭and‬ ‭services‬ ‭at‬ ‭the‬ ‭existing‬ ‭price‬ ‭levels.‬ ‭Therefore,‬ ‭the‬ ‭increase‬ ‭in‬ ‭wages‬‭leads‬‭to‬‭a‬‭shift‬‭of‬‭the‬‭SRAS‬‭to‬‭the‬‭left‬ ‭,‬‭from‬‭SRAS₁‬‭to‬‭SRAS₂.‬‭The‬‭increase‬‭in‬‭wages‬‭and‬ ‭the leftward shift of the SRAS curve lead to several changes:‬ ‭○‬ ‭Higher‬‭wages‬‭reduce‬‭the‬‭proftability‬‭of‬‭businesses,‬‭causing‬ ‭a‬‭decrease‬‭in‬‭the‬‭quantity‬ ‭of goods and services supplied‬ ‭.‬ ‭○‬ ‭As‬ ‭production‬ ‭costs‬ ‭rise,‬ ‭businesses‬ ‭may‬ ‭increase‬ ‭prices,‬ ‭reducing‬ ‭the‬ ‭quantity‬ ‭of‬ ‭goods and services demanded‬ ‭.‬

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