Explain what a supply shock is, using a relevant example.

A supply shock happens when an event causes an economy's Short-Run Aggregate Supply (SRAS) curve to shift up or down the Aggregate Demand (AD) curve. In the case of a negative supply shock this shift causes output levels (Y) to decrease, while increasing general price levels (P). Conversely, a positive supply shock increases output levels, while decreasing price levels. A fitting example for a negative supply shock is the prospect of a no-deal Brexit, with cross-boundary supply chains being severely disrupted for British manufacturers, causing the necessary shift in SRAS.

Answered by Arthur V. Economics tutor

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