Question

How can we tell the difference between AD shock and an AS shock

Answer 1

AD shock and AS shock

aggregate demand shock:
In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily. A positive demand shock increases aggregate demand (AD) and a negative demand shock decreases aggregate demand. ... When the taxpayers use the money to purchase goods and services, their prices go up.

example:
A demand shock is a large but transitory disruption of the market price for a product or service, caused by an unexpected event that changes the perception and demand. An earthquake, a terrorist event, a technological advance, and a government stimulus program can all cause a demand shock

Demand Shock:
A demand shock is a sudden unexpected event that dramatically increases or decreases demand for a product or service, usually temporarily. A positive demand shock is a sudden increase in demand, while a negative demand shock is a decrease in demand. Either shock will have an effect on the prices of the product or service. A demand shock may be contrasted with a supply shock, which is a sudden change in the supply of a product or service that causes an observable economic effect.  Supply and demand shocks are examples of economic shocks.

A demand shock is a large but transitory disruption of the market price for a product or service, caused by an unexpected event that changes the perception and demand.

• Positive Demand Shocks:

Positive demand shocks have the effect of increasing aggregate demand in the economy, leading to increased consumption.

Examples of positive demand shocks include:

1 Interest rate cuts
2 Tax cuts
3 Government stimulus

Companies anticipating increased revenues may respond by hiring more workers or expanding operations. This increase in hiring and economic activity feeds back to lead to even more consumption. One drawback of a positive demand shock is that it can lead to higher prices if the economy is near full capacity, which heightens inflation risks.

• Negative Demand Shocks:

Negative economic shocks have the effect of creating fear. In this mindset, people are more inclined to save rather than consume.

Examples of negative demand shocks include:

1 Terrorist attacks
2 Natural disasters
3 Stock market crashes

In times of negative demand shocks, people are less inclined to take risks to start a business or pursue an education, which are activities integral to economic growth. Although these decisions may be rational on an individual basis, on an aggregate basis, it can lead to crippling economic losses. To balance such a negative demand shock, governments may be inclined to lower interest rates, cut taxes or increase spending to reverse a self-reinforcing negative spiral. This is essentially intended to introduce a positive demand shock to counteract a negative one.

Aggregate Demand :
Aggregate demand is an economic measurement of the total amount of demand for all finished goods and services produced in an economy. Aggregate demand is expressed as the total amount of money exchanged for those goods and services at a specific price level and point in time.

Aggregate Demand Controversy :
As we saw in the economy in 2008 and 2009, aggregate demand declined. However, there is much debate among economists as to whether aggregate demand slowed, leading to lower growth or GDP contracted, leading to less aggregate demand. Whether demand leads growth or vice versa is economists' version of the age-old question of what came first—the chicken or the egg.

The relationship between growth and aggregate demand has been the subject major debates in economic theory for many years.

Early economic theories hypothesized that production is the source of demand. The 18th-century French classical liberal economist Jean-Baptiste Say stated that consumption is limited to productive capacity and that social demands are essentially limitless, a theory referred to as Say's law.

Say's law ruled until the 1930s, with the advent of the theories of British economist John Maynard Keynes. Keynes, by arguing that demand drives supply, placed total demand in the driver's seat. Keynesian macroeconomists have since believed that stimulating aggregate demand will increase real future output. According to their demand-side theory, the total level of output in the economy is driven by the demand for goods and services and propelled by money spent on those goods and services. In other words, producers look to rising levels of spending as an indication to increase production.

Keynes further argued that individuals could end up damaging production by limiting current expenditures—by hoarding money, for example. Other economists argue that hoarding can impact prices but does not necessarily change capital accumulation, production, or future output. In other words, the effect of an individual's saving money—more capital available for business—does not disappear on account of a lack of spending.

Limitations of Aggregate Demand :

Aggregate demand is helpful in determining the overall strength of consumers and businesses in an economy. Since aggregate demand is measured by market values, it only represents total output at a given price level and does not necessarily represent quality or standard of living.

Also, aggregate demand measures many different economic transactions between millions of individuals and for different purposes. As a result, it can become challenging when trying to determine the causality of demand and run a regression analysis, which is used to determine how many variables or factors influence demand and to what extent.

KEY TAKEAWAYS :

• Aggregate demand is an economic measure of the total amount of demand for all finished goods and services produced in an economy.
• Aggregate demand is expressed as the total amount of money spent on those goods and services at a specific price level and point in time.
• Aggregate demand consists of all consumer goods, capital goods (factories and equipment), exports, imports, and government spending.