Question

2. Which direction would each of the following changes in conditions cause the aggregate supply to shift?

1. Energy costs increase due to increased political tensions in the Middle East.
2. Labor unions agree to a cut in wages due to Covid-19 reduced aggregate expenditure.
3. Increased used of less expensive solar power.
4. Increases in excise tax on all fossil fuels.

Answer 1

Ans) 1) Increase in energy cost will decrease aggregate supply because production cost will increase.

AS curve will shift to the left and price level will increase while output will decrease.

2) Cut in wages will increase aggregate supply due to decrease in cost of production.

AS curve will shift to the right. Price level will decrease and output will increase.

3) Increased use of less expensive solar power will again cut the cost and aggregate supply will increase. AS curve will shift to the right. Price level will decrease and output will increase.

4) Increase in excise tax will reduce aggregate supply, AS curve will shift to the left. Price level will increase and output will decrease.