Question

Briefly explain how each of the following events would affect the short-run aggregate supply curve. a. An increase in the price level b. An increase in what the price level is expected to be in the future c. A price level that is currently higher than expected d. An unexpected increase in the price of an important raw material e. An increase in the labor force participation rate

Short answer

a. No shift, movement along the curve. b. SRAS shifts left. c. Movement along the curve. d. SRAS shifts to the left. e. SRAS shifts to the right.

Step-by-step solution

Analyze Event a

An increase in the price level in the short run doesn't affect the position of the SRAS curve. This is because the SRAS curve itself shows the relationship between the price level and the quantity of goods and services supplied in the short run. So, when the price level increases, we move along the SRAS curve, not shift it.

Analyze Event b

An increase in what the price level is expected to be in the future leads to a decrease in short-run aggregate supply, shifting the SRAS curve to the left. This is attributed to the fact that when producers expect higher prices in the future, they might decrease their current production, waiting for the future where they can sell their goods at a higher price.

Analyze Event c

A price level that is currently higher than expected would result in a movement along the SRAS curve, not a shift. Here, suppliers could supply more than they had planned since prices are higher, leading to an increase in the quantity of goods supplied in the short-run.

Analyze Event d

An unexpected increase in the price of an important raw material leads to an increase in production costs, which decreases the short-run aggregate supply. This would shift the SRAS curve to the left.

Analyze Event e

An increase in the labor force participation rate means more people are available for work. This increases the availability of labor, reduces the wage rate and hence, reduces the cost of production. This in turn increases the short-run aggregate supply, causing the SRAS curve to shift to the right.

Key concepts

Price Level

Understanding the price level within an economy is crucial for comprehending the dynamics of aggregate supply and demand. The price level refers to the average of current prices across the entire spectrum of goods and services produced in the economy. It is often measured by a price index, such as the Consumer Price Index (CPI).

In terms of the short-run aggregate supply curve (SRAS), a change in the price level results in a movement along the curve. If the price level rises, firms tend to increase the quantity of goods and services supplied, assuming that input prices remain constant in the short run. Conversely, if the price level falls, the quantity supplied would typically decrease. It is the cost of production, not the price level itself, that can shift the SRAS curve.

Expectations in Economics

In economics, expectations refer to the assumptions or beliefs regarding future events that can affect the decisions made by individuals and firms. For instance, if producers expect a future increase in the price level, they might adjust their current production decisions.

Producers may reduce their present supply, preferring to wait and sell when the price levels are higher, which can shift the SRAS curve. This response to expected future price increases represents a leftward shift, indicating a decrease in the quantity supplied at every price level in the short run. The anticipation of future economic conditions plays a significant role in shaping current economic activity.

Labor Force Participation Rate

The labor force participation rate is a measure of the active portion of an economy's labor force. It is calculated by dividing the number of people actively working or seeking work by the total number of individuals eligible to be part of the workforce.

An increase in the labor force participation rate indicates that more people are available to work, which can put downward pressure on wages due to increased competition for jobs. This, in turn, leads to a decrease in production costs for businesses, which might increase the short-run aggregate supply. Therefore, the SRAS curve would shift to the right, reflecting a higher quantity of goods and services supplied at each price level.

Economic Supply Shock

An economic supply shock refers to a sudden event that significantly changes the supply of a product or commodity, resulting in a sudden and unexpected change in prices. Such shocks can be either positive or negative. A negative supply shock, such as an unexpected increase in the price of an important raw material, leads to an increase in costs for producing goods and services.

As a consequence, the SRAS curve shifts to the left, signaling that at every price level, a smaller quantity of goods and services is supplied. This often results in higher prices for consumers and can slow economic growth temporarily. Supply shocks are complex events that can have multiple, rippling effects throughout an economy.