How would short terms shock impact the long term trend?

There is a generally acknowledged macroeconomic concept, economic cycle. Many people think it is not a big problem for an economy to experience several short term shocks as long as the long run trend is increasing. However, there have been several short term shocks that have changed the long term trend, for example, the slow down of the economic growth in Japanese and South America might be caused by such reason.

Short term shocks could deviated people’s expectations about the future from their original expectations. The changed expectations do not only include the expectations about the short term, but also include the expectations about the long term as well. People’s expectations about their near future would be accumulated to form long term expectations. When each individual makes a change according to his or her short term expectation change, a systematic change will be created in the economy. Such change could have a multiplier effect, this would lead to an immediate change in the market. However, under the surface of the systematic shock (change), there could be some unexpected changes undergoing, because individuals are not identical and they could taken different actions. These unexpected changes would change the fundament of the economy that deviate the economy from its previous track. Then the entire economic growth trend is shifted.

To conclude, short term shocks are potentially able to change people’s long term expectations, thus deviating the long term development track. Moreover, negative shocks could be more capable to create such long term deviation because people are more likely to be risk adverse and loss averse.