Supply shocks happen when something unexpected affects the supply of goods. This could be sudden oil price hikes or natural disasters. These shocks can really change the way the economy works. Let’s break down how they usually affect overall demand and supply:
Short-term Impact: When there’s a negative supply shock, it lowers the overall supply (AS). This means the AS line on a graph moves to the left, which causes prices to go up and the amount of goods produced to go down.
Inflationary Pressures: As a result, we see inflation, which means prices () increase while real GDP () decreases. This situation is called stagflation, where the economy isn’t growing but prices are still rising.
Long-term Effects: If the shock continues, people start to feel less confident about spending their money. This can lead to a decrease in overall demand (AD) since everyone tightens their budgets.
In short, supply shocks can upset the economy’s balance, making things more unpredictable!
Supply shocks happen when something unexpected affects the supply of goods. This could be sudden oil price hikes or natural disasters. These shocks can really change the way the economy works. Let’s break down how they usually affect overall demand and supply:
Short-term Impact: When there’s a negative supply shock, it lowers the overall supply (AS). This means the AS line on a graph moves to the left, which causes prices to go up and the amount of goods produced to go down.
Inflationary Pressures: As a result, we see inflation, which means prices () increase while real GDP () decreases. This situation is called stagflation, where the economy isn’t growing but prices are still rising.
Long-term Effects: If the shock continues, people start to feel less confident about spending their money. This can lead to a decrease in overall demand (AD) since everyone tightens their budgets.
In short, supply shocks can upset the economy’s balance, making things more unpredictable!