Economic Flactuations

Question 1

Shocks

Answer 1

shocks can be demand shocks or supply shocks

and negative (contractionary) or positive (expansionary)

Question 2

aggregate demand shocks are caused by

Answer 2

anything that
increases government spending, DESIRED investment, DESIRED consumption, and net exports

desired meaning the people spending decide to spend more rather than being forced to pay more

Question 3

causes of AD shocks

Answer 3

for government spending:
• war
• changes in ideology (david cameron believed in austerity)
• fiscal crises (greek government spending fell because the government didn’t have much money)

for investment and consumption:
• changes in wealth
• changes in taxes
• psychological changes (optimism)

for net exports:
• changes in exchange rates (SPICED- change in NX depends on elasticity of demand for domestic and foreign goods)
• foreign demand shocks (changes in optimism, taxes etc overseas)