Final answer:
Demand shocks and supply shocks can both positively and negatively affect the economy. Demand shocks are unexpected changes in the desire to buy goods and services, while supply shocks affect a firm's ability to produce. Recession and activities like the Phillips curve shifts are influenced by these shocks.
Step-by-step explanation:
The statement 'Demand shocks always have a negative effect on the economy' is not accurate. Demand shocks and supply shocks can have both negative and positive effects on the economy. Demand shocks refer to unexpected changes in the desires of households and businesses to buy goods and services, which can cause the economy to either expand or contract. On the other hand, supply shocks refer to unexpected changes in a firm's ability to produce and sell goods and services, such as an early freeze that destroys crops, leading to a leftward shift of the Aggregate Supply (AS) curve. A recession is typically characterized by a shrinking economy where business failures are not counterbalanced by successes, and widespread losses and layoffs occur, as observed during the 1970s oil crisis.
Supply shocks and changes in inflationary expectations can cause shifts in the Phillips curve, which represents the trade-off between inflation and unemployment. When people adjust their expectations about inflation, the perceived trade-off can disappear, leading to situations such as stagflation, where high inflation and high unemployment coexist.