Economic shocks

Date: 2015-10-07; view: 528.

Reading 2

Governments try their best to control economic growth, but there are some things that nobody can control. For example, war, political unrest in another country or simply a change in the weather can all affect an economy in unexpected ways. Sometimes the effect of these events will cause a sudden shift in aggregate demand or aggregate supply. This is an economic shock.

The causes of demand-side shocks may be events in the local economy (domestic demand) or events abroad (external demand). An example of domestic demand was when house prices in the UK dropped suddenly in 1980s. Because a home is one of the largest assets most people have, homeowners suddenly felt that they were not as wealthy as they had been. As a result, people started to spend less. This had a knock-on effect on the rest of the economy. Aggregate demand fell sharply and the gross national product fell with it.