What are aggregate supply shocks?
An aggregate supply shock is either an inflation shock or a shock to a country’s potential national output. Adverse aggregate supply shocks of both types reduce output and increase inflation and can increase the risk of stagflation for an economy.
What does supply shock mean in economics?
A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price. Assuming aggregate demand is unchanged, a negative (or adverse) supply shock causes a product’s price to spike upward, while a positive supply shock decreases the price.
What is an example of a positive aggregate supply shock?
Examples of positive supply shocks are decreases in oil prices, lower union pressures, and a great crop season. Examples of adverse supply shocks are increases in oil prices, higher union pressures, and a drought that destroys crops.
How does a supply shock affect aggregate supply?
The most common explanation is that an unexpected event causes a dramatic change in future output. According to contemporary economic theory, a supply shock creates a material shift in the aggregate supply curve and forces prices to scramble towards a new equilibrium level.
What is a negative aggregate supply shock called?
negative supply shock: a leftward shift in the SRAS and LRAS curves positive supply shock: a rightward shift in the SRAS and LRAS curves stagflation: an economy experiences stagnant growth and high inflation at the same time supply shock: an event that shifts both short run and long run aggregate supply curves.
How are aggregate supply and stagflation related?
The aggregate supply curve shifts to the right as productivity increases or the price of key inputs falls, making a combination of lower inflation, higher output, and lower unemployment possible. When an economy experiences stagnant growth and high inflation at the same time it is referred to as stagflation.
What is an example of a negative external shock to aggregate supply?
Demand shock is a surprise event that can lead to a temporary increase or decrease in demand for goods or services. An example of a negative demand shock would be a global pandemic.
What is a supply shock and why might a supply shock lead to stagflation?
A supply shock can cause stagflation due to a combination of rising prices and falling output. In the short run, an economy-wide positive supply shock will shift the aggregate supply curve rightward, increasing output and decreasing the price level.
What is aggregate supply example?
Examples of events that would increase aggregate supply include an increase in population, increased physical capital stock, and technological progress. The aggregate supply determines the extent to which the aggregate demand increases the output and prices of a good or service.