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

Understand Aggregate Supply

The aggregate supply curve represents the total quantity of goods and services that producers are willing and able to supply at different price levels. A rightward shift indicates an increase in supply, often due to factors that reduce production costs or increase productivity.

Option Analysis: New Technology

Analyze option (a): A new networking technology increases productivity all over the economy. An increase in productivity means that more goods and services can be produced with the same amount of resources, leading to a rightward shift of the aggregate supply curve.

Option Analysis: Rising Oil Prices

Analyze option (b): The price of oil rises substantially. Higher oil prices increase production costs, which would decrease the aggregate supply, causing a leftward shift. Hence, this option would not shift the supply curve to the right.

Option Analysis: Reduced Business Taxes

Analyze option (c): Business taxes fall. Lower taxes reduce the cost of production for businesses, which can encourage more output, leading to a rightward shift of the aggregate supply curve.

Option Analysis: Increased Wages

Analyze option (d): The government passes a law doubling all manufacturing wages. Doubling wages increases production costs, which decreases supply, causing a leftward shift. Therefore, this option would not result in a rightward shift.

Key concepts

Productivity

Imagine if you could do more with less effort. That's what productivity is all about! Productivity is the measure of how much output is produced using a given set of inputs, like labor and capital.
When we say productivity increases, it means that we can create more stuff without needing extra resources. Why does this matter for the economy? Well, when productivity rises, businesses can supply more goods and services at the same cost, or even less.

• New technology is a typical booster of productivity.
• Better training for workers is another way to enhance productivity.
• Streamlined processes help in achieving output with fewer resources.

Overall, an increase in productivity is a good sign for aggregate supply because it makes it easier and cheaper to produce things. This increased ability to produce can cause the whole supply curve to shift to the right, meaning more goods are available at every price level.

Business Taxes

You might already know that taxes are payments made to the government. Business taxes, in particular, are levied on companies' profits or production. These taxes affect how much businesses have left to reinvest in their operations.
If business taxes are lower, companies have more capital to spend on things like hiring workers or upgrading equipment.

• Lower taxes mean lower production costs for businesses.
• More available money for investment increases potential output.
• Businesses can expand operations with reduced tax burdens.

A reduction in business taxes can lead to a rightward shift in the aggregate supply curve because it reduces costs for producers. With more money in their pockets, businesses can supply more goods and services, boosting overall economic supply.

Production Costs

When it comes to production, costs are what businesses pay to make goods and services. Production costs can include wages, raw materials, and overhead expenses like rent and utilities.
If production costs rise, it becomes more expensive to create goods, often leading to a decrease in supply. Several factors affect production costs:

• Rising prices of key inputs like oil or raw materials.
• Increased wages or salaries paid to workers.
• Changes in regulations that affect how business is done.

Higher production costs can cause the aggregate supply curve to shift to the left, which means a smaller quantity of goods is available at existing prices. On the flip side, a decrease in production costs can lead to a rightward shift as producers are encouraged to supply more.

Consumer Prices

Consumer prices are the prices paid by individuals for goods and services. These prices impact not only consumer behavior but also how producers decide what to make.
If consumer prices are rising, this can lead to increased revenues for companies without a change in production costs—leading potentially to higher profit margins. Some points about consumer prices include:

• Stable consumer prices enable better planning for both businesses and consumers.
• If prices are expected to rise, consumers may buy in advance, affecting supply decisions.
• Conversely, if prices fall, businesses might cut production which can affect supply negatively.

Consumer prices directly affect demand levels, but indirectly, they can influence supply as well. If businesses expect consumer prices to remain stable, they're more likely to increase production, potentially shifting the aggregate supply curve to the right.