Suppose that the economy is currently at potential output. Also suppose that you are an economic policy maker and that a college economics student asks you to rank, if possible, your most preferred to least preferred type of shock: positive demand shock, negative demand shock, positive supply shock, negative supply shock. How would you rank them and why?

Potential output refers to the maximum output level that a country's economy can sustain over time without causing inflation to increase. It represents the long-term productive capacity of the economy. When an economy is at potential output, it means all the resources are being used efficiently and in a sustainable manner.

A positive demand shock occurs when there's an unexpected increase in demand for goods and services. This generally leads to higher output levels, increased prices, and higher employment. However, the short-term benefits might come at a cost of higher inflation in the long run, as firms need to adjust production levels and prices.

A negative demand shock refers to a sudden decrease in demand for goods and services. This typically results in lower output, a decrease in prices, and higher unemployment. The immediate consequences are unfavorable as the economy slows down, but if properly managed, inflation might remain stable in the long run.

A positive supply shock is an unexpected increase in the availability of goods and services in the market. This leads to lower prices, higher output, and possible an increase in employment. It improves the overall production efficiency and has the additional benefit of keeping inflation stable or decreasing.

A negative supply shock occurs when there's an unexpected decrease in the availability of goods and services in the market. This can be due to various reasons such as natural disasters or geopolitical events. Negative supply shocks typically lead to higher prices, decreased output, and increased unemployment. The effects are generally unfavorable, and it can also result in higher inflation levels.

Based on the analysis above, we can rank the economic shocks from most preferred to least preferred as follows: 1. Positive supply shock: It enhances the production efficiency, increases output and employment while keeping inflation stable or decreasing. 2. Positive demand shock: Although it can lead to increased output and higher employment, it might cause higher inflation in the long run. 3. Negative demand shock: Despite the unfavorable consequences in terms of lower output and increased unemployment, it might still keep long-term inflation stable if properly managed. 4. Negative supply shock: It is the least preferred of the four as it leads to reduced output, increased unemployment, and a potential increase in inflation levels.