Question

What are the primary shocks that are ultimate source of aggregate fluctuations? What is the mechanism by which an economy responds to any given shock?

Answer 1

Aggregate productivity shocks, aggregate investment shocks, consumption shocks and labour demand shocks are the some shocks which affects an economy.

Aggregate productivity shocks which can be interpreted in terms of decrease in output due to policy decisions- increase in interest rates or any other reason, i.e. obsolescence of technology, etc, and resulting decrease in aggregate investment and decrease in demand and decrease in demand for labor force and these factors who in aggregate affects the economy of a country.

Aggregate productivity shocks due to technological issues/obsolete technology and decrease in labor productivity and decrease in labour hours worked affect the economy.

Aggregate investment shock affects the output and decrease in labor demand and decrease in demand for goods and services in an economy.

In order to tackle aggregate productivity shocks due to decrease in output and labour productivity, an economy can put emphasis on the use of advanced technology for increasing the productivity and output per labor hour used.

For aggregate investment shock, an economy can decrease the interest rates in order to increase loans from business firms and individuals for increasing investment and production and to improve the investment scenario overall in the economy as well it will improve aggregate demand for labor force and will increase aggregate demand for goods and services and aggregate consumption in an economy.