Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What constitutes a price shock?

  1. A sudden increase in consumer demand

  2. A dramatic fluctuation in government policy

  3. An unexpected long-term increase in costs

  4. A temporary decrease in product supply

The correct answer is: An unexpected long-term increase in costs

A price shock refers to significant and often unexpected changes in the price of goods or services, which can be triggered by various factors. The correct choice highlights an unexpected long-term increase in costs. Such an increase can arise from various sources, including shifts in production expenses, resource scarcity, or changes in regulatory environments. When these costs rise unexpectedly, businesses may pass on these costs to consumers, leading to increased prices and potentially altering the market dynamics. In contrast, sudden increases in consumer demand could lead to temporary price increases, but they do not necessarily constitute a price shock by themselves. Dramatic fluctuations in government policy often affect market conditions and may lead to price changes, but they might not directly correlate with long-term cost increases unless they explicitly impact production or supply chains. Finally, a temporary decrease in product supply can create a short-term price spike, yet it lacks the long-term element that characterizes a price shock. Therefore, the emphasis on a long-term increase in costs captures the essence of a price shock more accurately.