Answer to Question #81167 in Macroeconomics for Zen

Question

4. Among the four economics shocks listed below, you must comment on each shock by stating which shock is the most preferred and the least preferred from the point of views of the economic policy advisors. If unclear (ie, cannot clearly say whether more or less preferred), state unclear and explain why. To answer, fill the cells marked with? in the following table.

Hints: Start from the situation where the economy is at potential output and then think about the shocks. No need to draw the AD-AS figure. Also, no need to comment on the policy reaction to each shock (that is beyond the coverage of this assignment).

Positive supply shock. Comment ?
Negative supply shock Comment ?
Positive demand shock. Comment ?
Negative demand shock. Comment ?

Answer 1

Positive supply shock is most preferred because it leads to an increase in output and a decrease in aggregate price levels. On the other hand, negative supply shock is least preferred because it results in an increase in price levels and a decrease in output levels, which translates to a decrease in the employment levels.
Positive and negative demand shocks are unclear. A negative demand shock leads to a reduction in price levels and output levels and hence an increase in unemployment levels. On the other hand, a positive demand shock leads to an increase in output, which enhances the employment levels, also increasing the price levels.