3. Among the four economics shocks listed below, you must comment on each shock

Question

3. Among the four economics shocks listed below, you must comment on each shock by stating which shock is the most preferred and the least preferred from the point of views of the economic policy advisors. Provide reason for each comment. If unclear (ie, cannot clearly say whether more or less preferred), state unclear and explain why. To answer, fill the cell marked with? in the following table ints: Start from the situation where the economy is at potential output and then think about the shocks. No need to draw the AD-AS figure. Also, no need to comment on the policy reaction to each shock. (8 marks) Type of shock Comments (l mark each) Reasons (l Reasons (1 mark each) Positive supply shock Negative supply shock Positive demand shock Negative demand shock?

Explanation / Answer

A positive supply shock is desirable because it raises output/income and reduces aggregate level of prices.This increases the GDP of a nation.

A positive demand shock is also desirable because it raises the national income of a country.

Negative demand and supply shocks are least preffered because they reduce the national income of a country.It makes the economy worse off.

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