Question

11. A.) Illustrate the impact of positive supply shock that occurs in an economy:

11. B.) What might cause a positive supply shock like this?

Answer 1

Answer : A) When aggregate supply increase in an economy then positive supply shock occur in that economy. In case of positive supply shock the aggregate supply curve shift to rightward on existing demand. As a result, the price level decrease. At lower price level the quantity demanded increase. Therefore, in an economy the positive supply shock decrease the price level and increase the quantity demanded.

B) When input cost decrease then producers produce more. As a result, the aggregate supply increase in the economy which shift the aggregate supply curve to rightward on existing demand. For this reason the positive supply shock may occur in the economy.