A negative demand shock refers to a decrease in aggregate demand, which is the total amount of goods and services demanded in the economy at a given price level. This can be caused by a decrease in consumer spending, an increase in taxes, a decrease in business investment, or an increase in the savings rate.
When a negative demand shock occurs, the aggregate demand curve shifts to the left, and the overall price level remains unchanged. This is because prices are sticky, meaning they do not adjust immediately when demand changes. As a result, aggregate output decreases and unemployment increases as firms lay off workers and reduce production due to decreased demand.
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