Econometric Analysis Aggregate Demand and Supply Shocks on Output in Pakistan

The current research investigates the Econometric Analysis Aggregate Demand and Supply Shocks on Output in Pakistan. Data were collected from various secondary sources. It was revealed that The supply shocks and inflation response is in the right direction. The demand shocks appear to have a permanent negative effect on the output level, with positive aggregate demand shock should increase the aggregate output but here the reverse situation occurs in case of Pakistan. With positive Aggregate Demand shocks output decrease. The possible explanation for this opposite to conventional wisdom result may be the phenomenon of “Expansionary Fiscal Contraction”. The response of output to the Aggregate Demand shocks might be due to the continuous fiscal deficit. In Pakistan it shows that government investment decisions rather that the government consumption decisions are more critical for the growth of economy. The situation shows the behavior in the long run existence of the fiscal deficit reduces the national savings, which affects significantly on the economic growth and economic performance.