A negative demand shock can cause:
A) a liquidity trap.
B) crowding out.
C) a recessionary gap.
D) an inflationary gap.

Question

Quizplus · Accepted Answer

A negative demand shock reduces aggregate demand, leading to lower output and potentially higher unemployment. This can create a recessionary gap, where actual output falls below potential output. A liquidity trap occurs when nominal interest rates are so low that monetary policy cannot stimulate the economy, which may or may not be a result of a negative demand shock. Crowding out occurs when government borrowing to finance deficits reduces the availability of credit for private investment, which may or may not be a result of a negative demand shock. An inflationary gap occurs when actual output exceeds potential output, generally as a result of excessive aggregate demand, which is not likely to occur following a negative demand shock.

A Negative Demand Shock Can Cause