An article on bloomberg.com observed that a trade war could have similar effects on the economy as a supply shock resulting from a large unexpected increase in oil prices: “Say the U.S. sharply reduced trade with China and Mexico: All of a sudden, companies would be forced to scramble to adjust their supply chains, and consumers would have to deal with shortages and higher prices.”

a. What are “supply chains”? 

b. Recessions in the United States are more often caused by demand shocks, such as a decrease in spending on residential housing, than by supply shocks. Compare a demand shock and a supply shock with respect to their effects on each of the following: 

i. The unemployment rate 

ii. The inflation rate 

iii. Real GDP.

c. Economists sometime argue that a supply shock presents the Fed with difficulties in implementing a countercyclical policy that a demand shock doesn’t. Do you agree? Briefly explain.