Macroeconomic Policy: Objectives and Instruments - Assignment Example

Productivity shocks are the haphazard vacillations that affect productivity level and subsequently influence growth in appositive or negative way. Productivity shocks consist of those factors that affect the effectiveness of utilizing capital and labor resources (Hansen, Gary D. 1985). Positive shocks increase the effectiveness of capital and labor resources in the economy. Productivity shocks can be as a result of several factors that include innovation, the price of capital goods, rates of interest, adverse weather and change in oil prices.

These have been noted to be consistent with the economic fluctuations trends over time.To illustrate why and how productivity shocks cause business cycle fluctuations we consider a case of the change in oil price. In a period of economic boom, oil prices together with commodity prices rise gradually as demand increases due to the increase in disposable income. This rigid demand leads to sharp increment in oil prices. If the high prices persist the developed economies will enter into recession which would result in a fall in demand.

These effects are usually significant and as have been characteristic in all the recessions in America and Europe. In the same way, a combination of productivity shocks has the effect of influencing the decisions of the players in the developed economies. It influences government policies, what companies produce and what consumers buy.