2. For each of the following, answer whether it would affect short-run aggregate supply, long-run aggregate...

2. For each of the following, answer whether it would affect short-run aggregate supply, long-run aggregate supply, both, or neither; and describe whether it would lead to an increase or a decrease.

(a) Energy prices decrease
(b) A new supply of natural resources is discovered

(c) Firms and workers expect the price level to fall
(d) New policies increase the cost of meeting new government regulations

(e) The number of workers in the labor force increases

Solutions

Expert Solution

a) short run aggregate supply would increase.

Energy is used for production and decrease in cost of production leads increase in supply.

b) short run and long run aggregate supply both would increase.

Discovery of new resource is an addition to resources which increase the economy's production capacity. This would increase the supply both in short and long run.

c) short run aggregate supply would increase

When firms and workers expect price to fall, new lower wage rate will be negotiated that would reduce the cost of production and thus increase the supply.

d) short run aggregate supply would decrease

Increase in government regulations discourages firms to enter and produce which reduces the supply.

e) short run and long run aggregate supply, both would increase

Increase in labor force decreases the wage rate and increases the economy's potential to produce. This leads increase in supply both in short and long run.

Rahul Sunny answered 11 months ago

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