Supply Shocks : A Common Phenomenon

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Supply shocks are a common phenomenon in the market situations. It is an event whereby there is a sudden change of service and goods prices due to an instant change in the supply function of the market. Supply shocks exist in two forms; negative supply shock and positive supply shock. The two types of supply shocks lead to the effect on the equilibrium price. Negative supply shocks involve the sudden decrease in supply and the instant increase in price of commodity. The end result of the negative supply shocks involve the stagflation of the market whereby output falls with raising prices. Positive supply shocks involve an increase in the supply of a commodity (Lewis & Mizen 2000). The essay aims at analyzing and describing the role of supply shocks in models of optimal discretionary monetary policy and reflecting on the application of the shocks to help central bankers in the financial crisis of 2007 to 2008.
Optimal Discretionary Monetary Policies
Optimal discretionary policies are initiatives that aim at improving the net worth of a market or economic situation. The optimal discretionary monetary policies are policies that ensure that there are monetary advantages within the market through ensuring that the money supply is favourable for handling of various tasks (Barro & Gordon 1983). The discretionary monetary policies are therefore aimed at initiating and developing money supply control measures through the policies models (Romer & Romer 2004). The models for the
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