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Supply Shocks

A supply-side shock is an event that causes an unexpected increase in costs or disruption to production. This will cause the short-run aggregate supply curve to shift to the left, leading to higher inflation and lower output.

Some recent examples of supply-side shocks affecting the UK include:

  • The COVID-19 pandemic, which caused widespread disruption to businesses and supply chains, leading to shortages of goods and services and higher prices.
  • The war in Ukraine, which has caused a sharp rise in energy prices and disrupted global food supplies.
  • The UK's decision to leave the European Union, which has led to uncertainty and delays in trade, and increased costs for businesses.

Supply-side shocks can have a significant impact on the economy, both in the short term and in the long term. In the short term, they can lead to higher inflation, as businesses pass on higher costs to consumers. They can also lead to lower output, as businesses cut back on production in response to higher costs or disruptions. In the long term, supply-side shocks can reduce economic growth, as they make it more difficult for businesses to invest and expand.

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