supply side shocks

Question 1

definition

Answer 1

supply side shock is an event that causes an unexpected increase in costs or disruption to production.

Question 2

effects

Answer 2

The level of national income can change in the short term if there is a supply-side shock. Many factors can bring about a sudden changes in supply, including changes in the following:

1. Wage levels, which affect firms’ unit labour costs.
2. Other costs of production, such as commodity prices
3. Indirect taxes, such as VAT.
4. Subsidies.
5. Productivity of factors, especially labour.
6. Changes in the use of technology and production methods.
7. Direct taxes, such as income tax
8. Length of the working week.
9. Labour migration.

Question 3

diagram

Answer 3

A cost shock will affect the aggregate supply curve in the short run, and the AS curve will shifts upwards and to the left. Taking the example of a wage shock, the increase in wages will lead to a rise in business costs, which will shift the AS curve shift upwards, causing the price level will rise from P to P1.