Table of Contents

Examples of Demand Shock

By

澳洲幸运5官方开奖结果体彩网:Brian Beers

Updated January 22, 2024

Reviewed by

Michael J Boyle

Fact checked by

Timothy Li

What Is a Demand Shock?

A surprise event that triggers an increase or decrease in demand for goods or services, either by a consumer or business, is known as a demand shock. Negative demand shock can begin with a global pandemic or natural disaster. A positive demand shock may start from an economic or 澳洲幸运5官方开奖结果体彩网:government stimulus.

Key Takeaways

Positive demand shocks increase aggregate demand in the economy.
Negative demand shocks decrease aggregate demand as individuals save rather than consume.
If a negative demand shock occurs, a government may counter it with a positive demand shock.

Positive Demand Shocks

Positive demand shocks increase aggregate demand in the economy, leading to increased consumption. Companies anticipating increased revenues may respond by hiring more workers or 🃏expanding operations. This increase in hiring and economic activity leads to further co𓄧nsumption.

A positive demand shock can lead to higher prices if the economy is near capacity, increasing the risk of 澳洲幸运5官方开奖结果体彩网:inflation. Examples of positive demand shocks include:

Important

World War II, the oil embargo of the 1970s, and the COVID-19 pandemic created demand shocks in the United States.

Negative Demand Shocks

Negative economic shocks often create fear. Individuals are more incli🅺ned to save rather than consume. They may be less inclined to take risks to start a business or pursue an education, activities integral to economic growth. On an aggregate basis, these individual decisions can lead to crippling economic losses.

To balance negative demand shock, governments may lower interest rates, cut taxes, or increase spending to reverse a negative spiral. This is intended to introduce a𒀰 positive demand shock to counteract a negative one. Examples of negative demand shocks include:

Global pandemics
Terrorist attacks
Natural disasters
Stock market crashes

What Is a Supply Shock?

The 🦋opposite of demand shock, a supply shock inc༺reases or decreases output, affecting prices.

How Can a Positive Demand Shock Trigger Inflation?

A positive demand shock, such as interest rate cuts, makes borrowing money cheaper, and encourages consumer and business spending, but can boost prices. Lowering rates can lead to problems such as inflation 💛and liquidity traps, which undermine t♉he effectiveness of low rates.

What Is an Economic Shock?

An 澳洲幸运5官方开奖结果体彩网:economic shock is any change to fundamental 澳洲幸运5官方开奖结果体彩网:macroeconomic variables that affect macroeconomic outcomes and measures of economic performance, such as unemploymenꦑt, consumption, and infl༺ation. A demand shock is a type of economic shock.

The Bottom Line

Demand shocks can be positive or negative and result from a surprise event that triggers an increase or decrease in demand for goods or services. A demand shock is a🔯 type of economic shock that affects the aggregate economy.

Article Sources

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