Question

Explain how each of the following events would affect the short-run aggregate supply curve.
a. An increase in productivity
b. A decrease in cost of energy
c. A decrease in income tax
d. Many firms relocate to China looking for lower wage rate
e. A decrease in the number of discouraged workers

Answer 1

a. An increase in productivity will shift the short run aggregate supply curve rightwards.

Reason: With the rise in productivity, more output can be produced with the same number of labor and therefore, the supply curve will shift rightward that will lead to the increase in production with same input factors.

b. A decrease in cost of energy will shift the short run aggregate supply curve rightwards.

Reason: Energy the one of the input used during the production process and fall in the cost of energy will therefore reduce input price and give incentive to the producer to produce more with the same cost. Therefore, decrease in input price will shift the supply curve rightwards.

c. A decrease in income tax will shift the short run aggregate supply curve rightwards.

Reason: A fall in income tax will encourage the labor to increase their income by supply more labor work in the market. Therefore, with more labor hour, the short run supply curve will shift rightwards.

d. Many firms relocate to China looking for lower wage rate: This will shift short run aggregate supply curve leftward.

Reason: If the firm will relocate to china, then the supplier contributing to the aggregate supply of the nation will fall and therefore will less firm, the short run aggregate supply curve will shift leftward.

e. A decrease in the number of discouraged workers: This will shift the short run aggregate supply curve leftward.

Reason: With discouraged labor, the supply of the labor input will reduce and therefore will cause a leftward shift in the short run aggregate supply curve.