Practice question · Sort into groups
Demand shock or supply shock?
Groups: Demand shock · Supply shock
- A drought destroys the wheat harvest
- OPEC embargo quadruples oil prices
- Government increases spending during a boom
- Central bank cuts interest rates to stimulate borrowing
Hints
- Demand shocks move the two variables oppositely.
- Cost shocks move them in the same direction.
Show the answer
Demand shock: Government increases spending during a boom, Central bank cuts interest rates to stimulate borrowing
Supply shock: OPEC embargo quadruples oil prices, A drought destroys the wheat harvest
Why
Demand shocks shift spending (inflation and unemployment move oppositely). Supply shocks shift costs (they move together, the stagflation pattern).
Practise Oil Shocks and Stagflation
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More questions on Oil Shocks and Stagflation
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