A demand shock is an unexpected positive or negative change in aggregate demand. For instance, suppose that scientists announce that an asteroid is set to collide with the Earth next year, wiping out the planet. People would rush to enjoy life and spend all of their money, constituting a positive demand shock. (A rather unfortunate way to stimulate the economy!) More realistically, government policies, political conditions, and natural disasters may all cause demand shocks.
Changes in the spending behavior of households or firms could also be labeled a demand shock. A change in demand is usually called a "shock" if it deviates from previous trends and expectations. This observation suggests some ambiguity in the definition: what for one analyst might be an unanticipated "shock" could be for another what she has been predicting all along.
Government policy may also lead to demand shocks. Changes in goverment spending relative to previous trends are important sources of shocks to aggregate demand. Tax policy changes also can shock aggregate demand if they affect spending of firms or households.
Related Terms: Supply Shock