Identify whether the following cases mentioned in part 1 to 5 represent an “Aggregate
Demand shock” or “Aggregate Supply shock”, graphically sketch the impact of each
shock within AD-AS framework, and discuss the role a stabilization policy can play in
each case to counter the shock:
1. People living in the economy have become inclined to hold more money due to lack
of trust on financial markets which provide alternative means of keeping their money.
2. ‘Drought’ has struck the economy badly and has caused major destruction to the yields
of many crops.
3. Central bank decides to increase money supply.
4. Firm owners decide to provide fewer capital units to the labor they have employed.
5. If the specific economy is subject to energy crisis.
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