- Demand shock
- A demand shock is an unexpected event that shifts the aggregate demand curve by changing consumption, investment, government spending or net exports.
- Supply shock
- A supply shock is an unexpected event, such as a jump in the price of oil, that shifts the short-run aggregate supply curve.
Four kinds of economic shock
Can you name the four kinds of economic shock?
A shock hits the demand side or the supply side, and it is negative or positive.
A negative demand shock is a sudden fall in spending, such as a collapse in confidence, that shifts AD to the left.
Can you think of an example?
In the global financial crisis banks cut lending and firms shelved investment, so AD shifted left and UK output fell.
A positive demand shock is a sudden rise in spending, such as a surge in export orders, that shifts AD to the right.
Can you think of an example?
Rising house prices make homeowners feel wealthier, so they borrow and spend more, and AD shifts right.
A negative supply shock is a sudden rise in costs across the economy, such as dearer oil, that shifts SRAS to the left.
Can you think of an example?
In the 1970s the world price of oil rose several times over, and the UK had rising prices alongside rising unemployment.
A positive supply shock is a sudden fall in costs across the economy, such as cheaper oil, that shifts SRAS to the right.
Can you think of an example?
When the world price of oil roughly halves, firms' fuel and transport costs fall, so output rises and inflation falls.