Question

Economies and households are constantly exposed to local or international events that affect the macroeconomy. These shocks can be temporary or permanent. Classify the following shocks as temporary or permanent and briefly explain your answer.

• Technological change that resulted in high unemployment rate.
• Federal bank change the cash rate.
• Global pandemic that affect trade following an outbreak.

Answer 1

Answers and explanations:

• Technological change that resulted in high unemployment rate
  • A technological advancement is considered as a permanent shock. The production process changes for good, and it creates certain economic effects. The effect on unemployment may slowly fade away, but it will never be zero.
• Federal bank change the cash rate
  • This is a temporary shock. Due to changes in cash rate, the cost of borrowing will change. But these changes will only be applicable till the time the rates are changed again. With every subsequent change in rates, it will only affect the new borrowers.
• Global pandemic that affects trade following an outbreak
  • This is a temporary shock. However, the duration of effect of this event cannot be predicted. Most economists believe that the decline in trade is only temporary. With many countries, trade has already started picking up.