Question

Explain how each of the following events would affect the long-run aggregate supply curve.

a. A lower price level (5 points)

b. A decrease in the labor force (5 points)

c. A decrease in the quantity of capital goods (5 points)

d. Technological change (5 points)

e. An unexpected decrease in the price of an important raw material (5 points)

Answer 1

a)

Change in price level does not affect the long run aggregate supply curve. Long run supply curve is vertical.

b)

Decrease in labor force will shift the supply curve to left thereby signifying fall in supply.

c)

Decrease in quantity of capital good will also shift the supply curve to left.

d)

Technological change increases productivity, thus there is rightward shift in aggregate supply curve.