Question

The following graph shows an increase in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the right from AS to ASs, causing the quantity of output supplied at a price level of 100 to rise from $200 billion to $250 billion.

Answer 1

In the short run, aggregate supply (AS) represents the total quantity of goods and services that all firms in an economy are willing and able to produce at different price levels. An increase in short-run aggregate supply (AS) means that, at each price level, producers are willing and able to supply a greater quantity of output compared to before.

Here are some key implications of an increase in short-run aggregate supply:

1. Increased Output: The increase in short-run aggregate supply means that the economy can produce more goods and services at each price level. In the given example, the quantity of output supplied at a price level of 100 has risen from $200 billion to $250 billion.

2. Lower Price Level: The increase in supply often leads to a decrease in the price level of goods and services. This is because higher output levels can result in increased competition and reduced production costs, leading to lower prices.

3. Positive Economic Impact: An increase in short-run aggregate supply is generally seen as positive for the economy. It can lead to higher levels of employment, increased production, and potentially higher economic growth.

4. Short-Term Effect: It's important to note that the short-run aggregate supply curve represents the economy's capacity to produce in the short term. Factors such as input prices, technology, and production capacities influence short-run aggregate supply.

5. Long-Run Implications: While the short-run aggregate supply curve can shift due to temporary factors, the long-run aggregate supply (LRAS) curve represents the economy's potential output when all factors of production are fully utilized. In the long run, the economy's aggregate supply is primarily determined by factors such as technology, labor force, and capital accumulation.

Remember that economic changes are dynamic and influenced by various factors. Interpretation of a specific graph requires a visual representation of the graph and a deeper understanding of the economic context it represents.

Answer 2