What is a supply shock?

• A. An expected increase in supply
• B. A gradual increase in supply
• C. An unexpected event affecting supply
• D. A reduction in consumer demand

Answer: (C)

A supply shock refers to an unexpected event that significantly impacts the supply of goods and services in an economy. This can be caused by various factors such as natural disasters, geopolitical events, or sudden changes in market conditions that disrupt normal production processes. Because these shocks are unexpected, they can lead to rapid changes in prices and quantities available in the market, potentially causing inflation or shortages, depending on the nature of the shock.

In this context, the other choices do not align with the definition of a supply shock. An expected increase in supply suggests a predictable and planned change in market dynamics, while a gradual increase in supply implies a slow and steady change rather than a sudden event. Lastly, a reduction in consumer demand pertains to shifts in demand rather than supply. Therefore, the correct understanding of a supply shock is captured in the option describing it as an unexpected event affecting supply.