ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Namely, a negative supply shock can trigger a demand shortage that leads to a contraction in output and employment larger than the supply shock itself. We call supply shocks with these properties Keynesian supply shocks. Temporary negative supply shocks, such as those caused by a pandemic, reduce output and employment.

Detailed explanation-2: -When Aggregate demand is less than Aggregate supply, then the planned inventory rises above the desired level. To clear the unwanted increase in inventory, firms plan to reduce the production output till Aggregate demand becomes equal to Aggregate supply.

Detailed explanation-3: -Negative shocks decrease output and increase unemployment. Positive shocks increase production and reduce unemployment. The effect on inflation, however, will depend on whether the shock was a supply shock or a demand shock.

Detailed explanation-4: -An increase in the price of natural resources or any other factor of production, all other things unchanged, raises the cost of production and leads to a reduction in short-run aggregate supply.