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What are supply shocks? 

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Supply shocks are events that cause the supply of a given good or service (or of most goods and services) to change drastically and quickly.  There can be supply shocks that lower supply and supply shocks that increase supply.

A classic supply shock that is said to have lowered aggregate supply is the oil embargo imposed by members of OPEC in 1973.  When the supply of oil dropped suddenly, aggregate supply dropped as well because oil was and is vital in practically every American economic activity.  This helped to cuase the “stagflation” of the 1970s.

There can also be positive supply shocks as well.  This can be caused by a technological breakthrough that decreases the costs of production and/or makes production much faster and more efficient.  Examples of this tend to occur in single industries rather than in the economy as a whole, such as periodically occur in electronics industries causing prices to drop.

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