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, and negative supply shock. How would you rank them and why? 100-300
words
A good way to approach this question is to first draw a graph with an Aggregate Demand and an
Aggregate Supply curve that intersect at the Potential Real GDP line. Now, draw out each scenario
listed above, the positive demand shock, negative demand shock, positive supply shock, and the
negative supply shock.
When you draw in the positive demand shock, the Aggregate Demand curve will shift right,
creating a new intersection point with the AS curve that is now away from the Potential Real GDP
line. Is the new Equilibrium Price Level higher or lower? Is the new Equilibrium Quantity higher
or lower? Use the answers here to determine if this is a good thing for the economy or a bad thing.
Repeat this process for the other three shocks.
Remember that some shifts may cause an increase in price and also an increase in quantity. The
increase in price is not good, yet the increase in quantity is, so you will need to think through where
this fits in the ranking.
1.Compose a 5-paragraph essay (APA format) to identify a minimum of 3 economic concepts
and/or theories from this course and how they relate to some current event (properly cite a
minimum of three electronic references).
2. Record the methods you used to discover these sources.
3. Which data bases did you search? What combination of search terms did you use? Which
methods resulted in the most hits? Which methods resulted in few or no hits?
Key Concepts
Government Purchases
Taxes
Transfer Payments
Expansionary and contractionary policies
Effect of the multiplier and MPC
Budget balance, surplus and deficit
National Debt