What occurs during a demand shock?

During a demand shock, consumer demand changes suddenly and unexpectedly, significantly impacting the overall economy. This can occur due to various factors, such as sudden shifts in consumer preferences, changes in income levels, or unforeseen events that influence consumer behavior, like a pandemic or a financial crisis.

When such a shock occurs, businesses may experience a rapid increase or decrease in demand for their products or services. This volatility can lead to immediate responses from suppliers, including adjustments in production rates, inventory management, and pricing strategies. The effects of a demand shock are broadly felt across the economy, often leading to changes in employment levels, investment decisions, and even pricing models for goods and services.

In contrast, the other options describe different economic scenarios not directly related to a demand shock. Natural disasters tend to affect supply rather than demand, while government policies that restrict consumer spending focus on the supply side of the market rather than abrupt changes in consumer behavior. Lastly, an increase in production capacity pertains more to supply-side economics, where companies are preparing to produce more, which does not reflect a sudden change in consumer demand.