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A technology shock is the kind resulting from a technological development that affects productivity. If the shock is due to constrained supply, it is termed a supply shock and usually results in price increases for a particular product. Supply shocks can be produced when accidents or disasters occur.
In the short run, an economy-wide negative supply shock will shift the aggregate supply curve leftward, decreasing the output and increasing the price level. [1] For example, the imposition of an embargo on trade in oil would cause an adverse supply shock, since oil is a key factor of production for a wide variety of goods.
Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the economy faces a supply shock, such as a rapid increase in the price of oil. An unfavourable situation like that tends to raise prices at the same time as it slows economic growth by making production more costly and less profitable.
“The prospect of a prolonged strike combined with a federal shutdown is the greatest threat to the American economy, future job growth, and our state's fiscal health if a deal is not made soon ...
For example, advocates of Real Business Cycle Theory [citation needed] argue that real shocks cause recessions and that the market responds efficiently to these real economic shocks. Krugman dismisses Say's law as, "at best, a useless tautology when individuals have the option of accumulating money rather than purchasing real goods and services ...
Usually, this event occurs after a demand or supply shock. The term can also be used to refer to profits obtained by practices inconsistent with a competitive free market, or to windfall profits. In some jurisdictions of the United States during civil emergencies, price gouging is a specific crime.
During the 2007–2008 financial crisis and the Great Recession, a negative demand shock in the United States economy was caused by several factors that included falling house prices, the subprime mortgage crisis, and lost household wealth, which led to a drop in consumer spending.
A string of such productivity shocks will likely result in a boom. Similarly, recessions follow a string of bad shocks to the economy. If there were no shocks, the economy would just continue following the growth trend with no business cycles. To quantitatively match the stylized facts in Table 1, Kydland and Prescott introduced calibration ...