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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

What might shift the aggregate-supply curve to the left? Use the model of aggregate demand and aggregate supply to trace through the short-run and long-run effects of such a shift on output and the price level.

To determine

Factors that cause the shifts in the aggregate supply curve.

Explanation

The supply is dependent upon the price level in the economy. When the price level is higher, the suppliers will be receiving higher income and this would incentivize them to increase the supply in the economy and vice versa. The aggregation of the supply curves of all the firms in the economy is known as the aggregate supply curve. In the short run, the aggregate supply curve represents the relationship between the price level in the economy and the supply by the firms.

There are many factors which lead to the shift in the aggregate supply curve. They are: the size of the labor force used in the process of production, the level of capital stock in the economy, the technology used for production, the expectations of the future price level, expected prices of the natural resources and the firms, and the workers adjusting to their previously underestimated price level.

When there is an increase in the labor force used in the production, more laborers will produce more output and the supply will increase, causing the SRAS curve to shift towards the right. The level of capital stock determines the labor force and the inputs used by the firms. When the level of capital sock increases, it will lead to an increase in the capability of the firms to use more inputs and produce more, which increases the supply and shifts the SRAS curve to the right. Similarly, the increase in the level of technology used will help the firms to increase their efficiency and productivity capacity, which will increase the supply as well as lead to the shift in the SRAS towards the right.

When the increase in the future expected price takes place, the firms will reduce their supply in the current period. They will keep the inputs with them, ready to supply in the period where the expected higher price level takes place...

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