What impact can shocks have on the AD-AS model?

Shocks can indeed shift the aggregate demand (AD) or aggregate supply (AS) curves in the AD-AS model, making the first option fundamentally correct. In macroeconomic terms, a shock is an unexpected or abnormal event that affects economic variables.

For example, a positive demand shock, such as increased consumer confidence or government spending, would shift the AD curve to the right, leading to higher output and price levels. On the other hand, a negative supply shock, such as a natural disaster or an increase in oil prices, would shift the AS curve to the left, resulting in lower output and higher prices—this phenomenon is often referred to as cost-push inflation.

Understanding this dual capacity of shocks to influence both curves is crucial as it helps in analyzing the overall economic equilibrium and its resulting impacts on output and pricing.