Question

9. A.) Illustrate the impact of negative supple shock that occurs in an economy.

9. B.) What might cause a negative supply shock like this? Explain in your own words.

Answer 1

9.A.) Negative supply shock is defined as unexpected economy disruption caused by natural disasters, political turmoil, adverse economic condition, that leads to steep decrease in the production level and hence increase in the cost of goods.The effect of negative shock is the decrease in supply amount that leads to short-run aggregate supply curve to shift leftward. This reduced supply leads to inflation and lower output.

9.B.) There are several reasons, that can lead to negative supply shock -  

1. Natural disaster leading to impact on production region may lead to reduction in production and hence reduction in supply

2. A steep and sudden increase in the price may lead to supply reduction

3. Political turmoil and workforce strikes may impact the production level severely leading to reduction in price

4. Increase in taxes and labor wages also impact production factor leading to negative supply shock