Answer to Question #219566 in Macroeconomics for KobbyChainz

Question

Discuss the effect of a favorable demand shock in the short-run and in the long-run in an (aggregate demand) AD-(aggregate supply)AS model.

Answer 1

Favorable demand shock tends to be a sudden demand increase which shifts short-run aggregate demand curve and leads to higher prices as well as reduction in real GDP.

Favorable demand shocks leads to higher costs and prices, lower real GDP and higher unemployment.

Unexpected changes within economic situations are known to be shocks. Unexpected fluctuations within the Aggregate Demand curve are known to be demand shocks. The self-correction mechanism's core premise is that shocks only matter in the near term. In the short run, when Agregate demand adjusts, unemployment and output may alter, however not in the long run. Within short term, output gaps related to a change within Aggregate Demand exist.