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14

By: Lexi Prochniak and Julia Jane Duggan

Supply shocks occur when there is a shift in the short-run aggregate supply curve. This could be due to a change in commodity prices, productivity, or nominal wages. There are both positive and negative supply shocks. A positive supply shock increases aggregate output and decreases aggregate price level, while a negative supply shock decreases aggregate output and increases aggregate price level. Therefore, with a positive supply shock, the graph shifts rightward and with a negative supply shock, the graph shifts leftward. While supply shocks are less common than demand shocks, their consequences are far more severe.

The economy has a harder time dealing with supply shocks than demand shocks, which is why the time periods following supply shocks, especially negative supply shocks, are much harsher than demand shocks. For instance, since World War II, there have been twelve recessions in the United States. Eight of these recessions were the result of a demand shock, which causes the aggregate price level and aggregate output to move in the same direction. The remaining four recessions were caused by supply shocks, and resulted in the lowest unemployment rates since World War II. Additionally, in each supply shock case, there was political turmoil occurring somewhere in the Middle East. The Arab-Israeli War in 1973 and the Iranian Revolution of 1979 were two events that both were factors of the supply shocks, as world oil prices were disrupted and thus greatly increased. The Great Recession of 2008 was also a product of a supply shock, and caused extremely low high rates of unemployment.

This graph clearly shows the jump in oil prices during 2008. This negative supply shock caused production costs to increase, thus causing the price of oil to greatly increase as well.

Thus, despite the fact that supply shocks do not occur often, they are nonetheless ruthless in their outcomes.  

Sources: FRED series CUUR0000SEHE and series NROU

18

By: Lexi Prochniak and Julia Jane Duggan

Though a growing economy is usually a sign of productivity and prosperity, it does come with a  cost. As the economy has grown and evolved, the use of greenhouse gases has increased significantly as well. There is undoubtedly a positive correlation between economic growth and greenhouse gas emissions. One of the biggest concerns regarding today’s global climate is the impact of fossil-fuel consumption on the environment. The byproduct of utilizing coal and oil is the release of carbon dioxide into the atmosphere, which has polluted the Earth and increased the greenhouse effect. As a result, the planet’s temperature has been rising at a constant rate, affecting many things from rising sea levels to agricultural disruptions. These issues have created speculation about whether or not long-run economic growth can continue while decreasing the use of greenhouse gases. Most economists think this is possible, but not without government intervention and protection on the environment.

Developing countries play a large role in the issue of climate change. As underdeveloped countries become more advanced, their use of greenhouse gasses will inevitably increase. However, if a commitment to environmentally friendly policies is made as these countries develop, detrimental effects to the environment could be greatly lessened. Not only could emissions and energy use be reduced, but jobs could be created in environmental fields, boosting the economy. Though this sounds like an ideal step towards reducing greenhouse gas emissions, there is a great lack of funding needed for these types of projects, as seen in the figure below. Due to the potential benefits of implementing these, a concerted effort should be made to finance the implementation of environmentally friendly technologies and policies.

Sources:
Global Economic Symposium, FRED, and EPA