Question

Graded: Aggregate Supply Discussion (Extra Credit Possible) 24 24 unread replies. 24 24 replies. Describe the change in aggregate supply that should result from each of the following changes in determinants. Assume that nothing else is changing besides the identified change. (Use “Decrease” or “Increase” and a minimum 2 sentences of explanation). (a) A rise in the average price of inputs; (b) An increase in worker productivity; (c) Government antipollution regulations become stricter; (d) A new subsidy program is enacted for new business investment in productive equipment; (e) Energy prices decline.

Answer 1

Ans (a) A rise in the average price of inputs: The aggregate supply curve decreases and shift to left (upward), which raises the price level and decreases the output. This is the case of adverse supply shock. This raises cost of production and firm would produce less, hence aggregate supply shift to left.

(b) An increase in worker productivity: This would increase the aggregate supply curve and it shift to the right (downwards), which decreases price level and increases output. The increase in worker productivity would help the firm to produce more and more output with given level of employed workers.

(c) Government antipollution regulations become stricter: It means more taxes or increasing cost of pollution control devices, which raises the cost of production, hence, the aggregate supply curve shift to left which raises the price level and decreases the output.

(d) A new subsidy program is enacted for new business investment in productive equipment: This would encourage the new firms to enter and production rises in the economy. The aggregate supply rises and the aggregate supply curve shift to right which reduces the price level and increases the output in the economy.

(e) Energy prices decline: This reduces the cost of production and producers are encouraged to produce more. Hence, the aggregate supply rises and the aggregate supply curve shift to right which decreases price level and increases output.