2.2 Economic Shocks

Question 1

Economic shock definition

Answer 1

Sudden unexpected events that affect the macroeconomy

Question 2

What are the two types of economic shock?

Answer 2

Demand-side shocks and supply-side shocks

Question 3

Demand side shocks definition

Answer 3

Unexpected and significant changes in the level of aggregate demand

Question 4

Supply-side shocks definition

Answer 4

Unexpected and significant changes in the price of factors of production or the availability of factors of production

Question 5

What will the demand side shock affect?

Answer 5

• level of real national output
• unemployment
• inflation

Question 6

What does supply-side shocks affect?

Answer 6

• willingness for firms to produce output

- aggregate supply

Question 7

Why are supply-side shocks more negative than demand side shocks?

Answer 7

It is likely that the supply-side shock will affect both inflation and unemployment (Unlike demand side shocks that affect one or the other)

Question 8

Example of a supply side shock

Answer 8

• large oil price increase

- crop failure

Question 9

Example of a demand side shock

Answer 9

• banking crisis in 2008

- large change in exchange rate or interest rate