Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following would NOT typically cause a price shock?

1. A natural disaster affecting production

2. Government regulations increasing production limits

3. A sudden increase in demand for a product

4. A prolonged rise in input costs

The correct answer is: Government regulations increasing production limits

Government regulations that increase production limits are designed to enhance the overall supply of goods in the market. By allowing more production, such regulations help stabilize prices rather than cause significant fluctuations, which are characteristic of a price shock. Price shocks typically occur when there are unexpected and significant changes in supply or demand, leading to rapid shifts in prices. Natural disasters affecting production can drastically reduce supply, causing prices to jump as availability decreases. A sudden increase in demand for a product does the opposite by creating upward pressure on prices if supply cannot keep pace with the new level of demand. Prolonged rises in input costs can result in higher production costs, which manufacturers may pass on to consumers, leading to increased prices. Thus, only an increase in production limits serves to mitigate potential price shocks rather than contribute to them.