Keep in mind that ademand shockis a change in the equilibrium real GDP determined by the crossing points of IS and LM curves. Asupply shockis a change in the production capacity. When the change ispositive, the shock is called favorable. When the change isnegative, the shock is called adverse. Themagnitude of a demand shockis the absolute value of the change in equilibrium real GDP, and themagnitude of a supply shockis the absolute value of the change in the production capacity.

In 2019, the European economy was in a long-run equilibrium. In 2020, the with the outbreak of COVID-19, (1) many European households curtailed their consumption as they became concerned about potential loss of their employment and income. Also, (2) the pandemic prevented households from purchasing some of the goods and services that they would have bought if the risks of exposure to COVID-19 were absent due to both mandatory lockdowns and restrictions as well as voluntary decisions by households to reduce economic activity outside of their immediate residential areas and spending on basic needs. Finally, (3) investment expenditure declined as businesses in Europe wondered when the economy would recover.The three observations described heresuggest that as a result of the pandemic, the European economy must have experienced:(recall that you should select the best answer only)

a. no demand or supply shock.

b. a favorable demand shock.

c. an adverse demand shock.

d. a favorable supply shock.

e. an adverse supply shock.