‘Financial shock’


I saw this term on the news when discussing the economy and current inflation going on. What does this mean?

In: 1

“Financial” shock refers to the financial sector of the economy. Think banks, insurance companies, investment folks, etc. Meaning these institutions are getting a shake up and readjusting like the rest of us.

For example: Banks make money by lending money. Now that interest rates are high, people are discouraged from taking loans from a bank. Less credit being lended and less money being made by the bank.

Please ignore the other comment as it is completely incorrect.
First, we need to understand what a shock is. In economic terms a shock refers to a sudden movement that shifts economic relationships. For example the covid crisis caused a supply shock that suddenly decreased supply of goods. If you are familiar with supply/demand curve, this means a shift in the supply curve. Now a financial shock refers to sudden movements in for example asset prices or borrowing cost.

edit for clarity: shock just refers to a strong, sudden and unexpected movement of curves, it can be both “positive” or “negative” there is no judgement inherent in the term.