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Suppose that the economy has entered into a recession, and you are asked to determine whether...

Suppose that the economy has entered into a recession, and you are asked to determine
whether it has been caused by a demand shock or a supply shock. What one piece of data
about the current economic conditions will be most helpful in making this distinction?
Explain.

business   economics   
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Answer #1

In order to determine when the current recession in the economy is caused by a demand shock or supply shock we need data on total production of goods and services in the economy. If the total production in the economy is declining, then the recession is caused by a supply shock. On the other hand, if the total production in the economy is constant or is increasing, then recession is caused by a demand shock. Thus, data on total production in the economy is helpful to come to the conclusion whether the recession is caused by a demand shock or a supply shock.

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