Answer to Question #219723 in Macroeconomics for Icekid

Question

Discuss the effect of a favorable demand shock in the short-run and in the long-run in an (aggregate demand) AD-(aggregate supply)AS model.

Answer 1

A demand shock is a sudden and temporary increase or decrease in the demand for a good or a bundle of goods. A favourable demand shock will cause aggregate demand to increase. A demand shock has a short run effect on an output and unemployment but in the long run only the price level will be impacted. If there is an increase in aggregate demand the price level will go up. Positive shocks increase production and reduce unemployment. Demand shock effects can range from a few days to several days. A positive demand curve shifts right.

A short run shift in aggregate demand can change the equilibrium price and output level. In the long run increases in aggregate demand cause the price of a good or service to increase. In the long run the aggregate supply is affected only by capital, labor and technology.