Question

Aggregate supply shifts to the left when: Question 15 options: a) there is a decrease in regulations. b) subsidies are higher. c) input prices rise. d) inflation expectations are lower.

Answer 1

Leftward shift of the aggregate supply curve implies a decrease in aggregate supply.

When there is change in cost of production, there is change in aggregate supply.

As cost of production gets reduced, aggregate supply increases and vice versa.

Input cost is an important component of the cost of production.

If input prices rise then this will increase the cost of production. This increase in cost of production will reduce the profit margin of firms.

This will compel the firms to reduce production and as production gets reduced, aggregate supply will decrease.

This will result in the leftward shift of the aggregate supply curve.

Hence, the correct answer is the option (c).