Question

Which of the following will shift the aggregate supply curve to the right? a. A new networking technology increases productivity all over the economy. b. The price of oil rises substantially. c. Business taxes fall. d. The government passes a law doubling all manufacturing wages.

Short answer

Options A and C shift the aggregate supply curve to the right.

Step-by-step solution

Understanding the Aggregate Supply Curve

The aggregate supply (AS) curve represents the total supply of goods and services in an economy at different price levels. A shift to the right indicates an increase in total output or supply, meaning more goods and services are being produced at every price level.

Evaluating Option A

Option A states that a new networking technology increases productivity across the economy. Increased productivity means that more goods and services can be produced with the same amount of inputs. This results in a rightward shift of the aggregate supply curve.

Evaluating Option B

Option B mentions that the price of oil rises substantially. Oil is a critical input in many production processes, and a rise in its price would increase production costs. This would likely cause a leftward shift in the aggregate supply curve as it becomes more expensive to produce goods.

Evaluating Option C

Option C describes a fall in business taxes. Lower taxes reduce the cost burden on businesses, potentially allowing them to produce more. This reduction in costs could lead to a rightward shift of the aggregate supply curve, as businesses can expand production.

Evaluating Option D

Option D states that the government passes a law doubling all manufacturing wages. An increase in wages raises production costs for businesses. As a result, this policy could cause a leftward shift of the aggregate supply curve, as higher costs might reduce the supply of goods and services.

Conclusion

Among the given options, Option A (increased productivity due to the new technology) and Option C (a fall in business taxes) both lead to a rightward shift in the aggregate supply curve by contributing to either increased efficiency or reduced costs.

Key concepts

Productivity

Productivity, in economic terms, refers to how efficiently goods and services are produced. It is a crucial factor that influences the aggregate supply of an economy. When productivity increases, it means that more output can be generated from the same amount of input resources, such as labor and materials. This is often achieved through technological advancements, improved worker skills, or better production processes.

Consider a new networking technology that streamlines communication and processes across various sectors. Such a technology allows workers to accomplish tasks more effectively and reduces the time needed for production cycles. The result is a higher output without a correspondingly high increase in input—leading to enhanced productivity. With increased productivity, businesses can produce more goods and services at the same cost, which shifts the aggregate supply curve to the right.

• More output: Same inputs used more efficiently.
• Cost efficiency: Lower per-unit production costs.
• Economic growth: More goods/services boost economic output.

Business Taxes

Business taxes are levies imposed on companies' profits, and they directly affect the cost of running a business. When these taxes are high, they can stifle business expansion and productivity by reducing the capital available for reinvestment. Conversely, a reduction in business taxes can stimulate economic activity.

When governments lower business taxes, companies retain more after-tax income. This extra resource can be allocated toward enhancing their production capacities, hiring more staff, or investing in innovative technologies. These activities support a greater output at the same cost basis, which translates into an increase in the aggregate supply.

• Increased investment: More capital available for growth and innovation.
• Expansion: Easier to scale operations with more retained earnings.
• Job creation: Potential for hiring due to lower financial constraints.

Production Costs

Production costs refer to the expenses incurred in the process of manufacturing goods or providing services. These include costs for wages, raw materials, and overheads. The level of production costs significantly influences the aggregate supply curve.

If production costs rise, as seen with increases in wages or key material prices like oil, it becomes more costly for businesses to produce goods. This scenario typically results in a leftward shift of the aggregate supply curve because higher costs mean businesses might produce less to maintain profitability.

However, if production costs decrease—perhaps due to a reduction in raw material prices or an improvement in operational efficiency—businesses can offer more goods at lower prices, potentially leading to a rightward shift in the supply curve.

• Cost increase: May decrease output; shifts supply curve left.
• Cost reduction: Encourages output; shifts supply curve right.
• Profit margins: Affected by changes in production costs.