Economic shocks
Topic: Aggregate Demand, Income Determination and the Multiplier · NCERT: Class 7, Ch 8 "Banks and the Magic of Finance"
Meaning
Economic shocks are sudden, unexpected events that sharply change how people earn, spend and save. Examples include natural disasters, war, pandemics and sudden policy changes. A shock can make people cautious, so they save more and spend less. In the Keynesian model, this lowers the marginal propensity to consume. Aggregate demand then falls, and through the multiplier, output and income fall by an even larger amount. Shocks can therefore start or deepen a slump.
Example
During COVID-19 (2020–21), lockdowns and uncertainty made Indian households save more as a precaution, and consumption demand collapsed. In NCERT's example, news of an impending war cuts MPC from 0.8 to 0.5, and income falls from 250 to 100.
Don't confuse with
- Business cycle fluctuations: these are the regular ups and downs of an economy over time, often driven by changes in investment. A shock is a single, unexpected event that comes from outside.