Demand Shock

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DEFINITION

A sudden surprise event that temporarily increases or decreases demand for goods or services. A positive demand shock increases demand, while a negative demand shock decreases demand. Both positive and negative demand shock have an effect on the prices of goods and services.

INVESTOPEDIA EXPLAINS

When demand for a good or service increases (decreases) the price of that good or service typically increases (decreases) due to a shift in the demand curve to the right (left). This type of shock can come from such things as tax cuts or increases, loosening or tightening of the money supply and increases or decreases in government spending.

For example, a tax cut reduces the amount of money that taxpayers owe the government and frees up money for personal spending. This money is then used by taxpayers to consume certain products and services, which bids up their prices.


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