Question

Each of the follow scenarios depicts a situation that will result in some sort of demand shock. After reading each scenario, please determine whether the associated demand shock will be positive or negative. After several weeks of economic instability, the Swedish stock market begins to quickly decline as consumers lose confidence in the economy. After several years of rapid growth, the housing market begins to lose value and consumers scale back their spending in response. The United States government passes a tax cut of 4% for all citizens, resulting in an increase in their disposable income. The British government institutes a new public housing program which aims to build 3 million new apartment units across the United Kingdom. The introduction of the program dramatically increases the government\'s demand for raw materials and building supplies. Following a period of sustained economic decline, major companies in both the automobile and textile industries in the United States begin to lay off workers and close factories, citing loss of confidence in the ability of the American government to properly manage the economy.

Answer 1

a) Swedish Stock market = Negative demand shock.

b) Housing market = Negative demand shock.

c) US tax cut = Positive demand shock.

d) British government housing program = Positive demand shock.

e) Raw material increase = Positive demand shock.

f) Lay off in the US = Negative demand shock.

(Any even which increase the income, government purchase, export or investment are considered as a positive demand shock that will increase the demand. Any even that decrease the above variable are considered as a negative demand shock. )