Chapter 19, Problem 2MCQ

To determine

The correct option which causes a positive demand shock

Answer to Problem 2MCQ

From the available options, the correct option is an increase in wealth.

Explanation of Solution

The demand shock would be positive when it increases the demand suddenly by decreasing the price of goods and it would be negative when it decreases the demand by increasing the price of goods. Therefore, the correct option is increase in wealth which is a positive demand shock as it increases the demand in the market. Whereas, increase in taxes, pessimistic customer expectations, high stock of capital, and government spending do not cause positive demand shock because if there is an increase in tax rate then less quantity will be demanded in economy, and if people prefer to retain stock rather than investing then also there would be reduction in demand of goods.

Therefore, the correct option is a (an increase in wealth).

Economics Concept Introduction

Introduction: Any unexpected or uncertain event that cause the demand of goods and services in the market which in turn also affect the price of those goods and service is called demand shock.