In macroeconomics, aggregate demand shock is a change of an exogenous variable that causes the AD curve to shift; for example, an autonomous shift in demotic investment is an aggregate demand shock.

Autonomous domestic investment may either increase or decrease. An increase in autonomous domestic investment constitutes a positive demons hock. A decrees in autonomous domestic investment constitutes a negative demand shock.

(i)Positive demand shock. An increase in autonomous domestic will lead to an upward shift of the AD curve. The increase in GDP brought about by an increase in investment increases the transactions demand for money. This puts upward pressure on interest rates. If the monetary authorities are to hold the initial interest rates, they must buy all the extra bonds that are offered for sale. As a result, money stock in the economy will increase. This will further push up investment expenditure, aggregate demand and GDP. The economy would be in boom.

The boom would last till the aggregate supply curve become a vertical straight line. Any further increase in expenditure would only turn inflationary. The monetary aggregate demand curve will shift downwards, resulting in fall in GDP. To arrest this fall, monetary authorities would have to raise interest rates, to arrest increasing investment expenditure.

(ii) Negative demand shocks. A fall in autonomous domestic investment is a negative demand shock. If the monetary authority insists on maintaining original interest rates, aggregate demand curve will shift downwards, resulting in fall in GDP. To arrest this fall, monetary authorities would let the interest rate fall. Otherwise, the economy would be pushed into recession and ultimately into depression.

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