Question

Aggregate Demand and Aggregate Supply - End of Chapter Problem 6. Suppose that the economy is currently at potential output. Also suppose that you are an economic policy maker, and that a college economics student asks you to rank, if possible, your most preferred to least preferred type of shock: positive demand shock, negative demand shock, positive supply shock, negative supply shock. How would you rank them? Most preferred Positive demand shock Negative demand shock Positive supply shock Negative supply shock Least preferred Answer Bank

Answer 1

Most preferred will be be positive supply shock because it will increase real Output along with the reduction in prices

then positive demand shock because it will only increase price in long run but can increase output in short run.

negative demand shock will decrease price and can decrease output but only in short run.

whereas least preferred is negative shock in supply curve because it will reduce output as well as price