Question

5. (Changes in Aggregate Supply) What are supply shocks? Distinguish between beneficial and adverse supply shocks. Do such shocks affect the short-run supply curve, the long-run supply curve, or both? What is the resulting impact on potential GDP?

Answer 1

Supply shocks is a situation unexpected increasing (a positive supply shock) and decreasing the supply (a negative supply shock) of the output of the economy.

Postive supply shocks in economy occurs due to techonological progress in the industries leads to reduce cost of production, improves labor productivity, and more output in the economy

Negative supply shocks occur due to the natural disasters example drought results collapse of agriculture goods. Likewise, strike, lockout in production process results decline in the output level in the economy.

Supply Shock affects both short-run and long-run supply curve example negative supply shock results in left side shifting of the supply curve, similarly positive supply shocks results right side shifting of the supply curve.

Similar case with the long run aggregate supply curve. Potential GDP is a situation where the economy will operate in the maximum capacity the positive supply shocks results in achieving the potential GDP.