University of Central Florida (UCF) ECO2013 Principles of Macroeconomics Practice Exam 1

Supply shocks refer to sudden and unexpected events that significantly alter the availability of goods and services in the market. These can manifest in various forms, such as natural disasters, geopolitical tensions, or sudden increases in production costs due to shortages of key materials. When a supply shock occurs, it can lead to immediate changes in market prices and quantities supplied, fundamentally disrupting the equilibrium in the economy.

For example, a hurricane damaging oil refineries would abruptly decrease the supply of gasoline, leading to higher prices and potential shortages in affected areas. Understanding supply shocks is essential for analyzing how external events can impact economic activity, inflation, and overall market dynamics. This aligns perfectly with the recognized definition of supply shocks as events that cause unexpected changes in supply levels.