Question

Choose only ONE of the following to write your post (minimum of 200 words, maximum of 500 words):

1. You learned that there are 4 components of the AD: consumption spending, investment spending, government spending, and spending on exports minus imports. A change in one of these components would lead to a shift in the AD curve, causing an impact on real GDP and price level. Give one original example for each component explaining how this example would shift the AD curve (to the right or to the left) and how this will impact in the economy's real GDP and Price Level (will it cause them to increase or decrease?).

2. During the 1970s a new phenomenon called STAGFLATION happened in the U.S. economy. Stagflation means economic stagnation and inflation, so what was observed was high unemployment and inflation. During the 1970s what explained this situation was the supply shocks. Do a brief research on the internet and explain what a supply shock is and give 2 examples of supply shocks that affected the U.S. economy during the 1970s.

Answer 1

2. A supply shock occurs when the supply of a commodity suddenly increases or decreases. It is a shock because it is a sudden change and it ultimately affects the equilibrium output and price of the product. Thus as the supply declines drastically, it leads to an increase in the price as the quantity supplied reduces drastically. But at the same time in such a short time span, quantity demanded is the same because of which the price increases drastically and thus there is a rise in inflation.

As inflation increases, the aggregate level of supply of other goods and services in an economy declines because firms end up paying more and their costs of production increase. This leads to less output generation in an economy and thus less employment opportunities being available. Leading to economic stagnation in the economy coupled with inflation.

Two examples of supply shocks that affected the U.S economy during the 1970s are the shortages in supply of oil. As there was an oil embargo, supply of oil in the U.S economy declined drastically. This led to the government imposing price controls so that prices won't surge beyond a point. Leading to another supply shock as producers and suppliers found it non profitable to produce oil. Thus there was a dual supply shock of oil embargo and a decline in production of oil and other commodities which ultimately made the economy go through stagflation and this led to nations maintaining oil reserves and trying to find domestic means of producing oil.