Cyclical instability is caused by shocks either to demand or supply. Shocks are unexpected events that impact demand or supply in the economy, due to the fact that the UK operates in a global market the economy is susceptible to shocks from around the world.
Demand side shocks can be caused by:
· Changes in the rate of economic growth for countries that you have a lot of trade with
· Changes in aggregate demand
· A boom in capital expenditure
· A significant rise or fall in exchange rates in the short term
Supply side shocks can be caused by:
· Natural disasters which can impact the supply of certain goods (specifically the growth of crops in areas such as the Caribbean with unpredictable climates)
· Technology
· Political situations
Can a change in the rate of growth happen so quickly that you are not aware of it and thus it is a 'shock'?
ReplyDeleteInvestment is long term - can a 'change' be a 'shock'?
Any examples of 'political situations' affecting supply?
"A significant rise or fall in exchange rates in the short term"
ReplyDeleteIf there is a fall in exchange rates then surely the effect will be on imports and thus supply-side?
"as well as setting strict fiscal policy guidelines"
ReplyDeletesuch as?