Which of the following would cause the short-run aggregate supply curve to shift to the left?

Question

a. An increase in the interest rate

b. An increase in the wage rate

c. A decrease in the expected price level

d. A decrease in the capital stock

e. An increase in the natural rate of unemployment

Answer 1

Hi Sophie, here is the answer to your question.

The short run aggregate supply (SRAS) curve shows the amount of goods and services that firms supply in the short run. Unlike the long run aggregate supply curve, the SRAS is positively sloped. A leftward shift of the SRAS happens when the supply of goods and services fall in the short run.

Short run supply of goods and services will fall if

b. there is an increase in the wage rate. This will increase the cost of production for firms and therefore reduce supply of goods and services at any price. This will shift the SRAS to the left.

d. a decrease in the capital stock - with fewer capital goods, the supply of goods and services that firms can produce will decrease. This will shift the SRAS to the left.

e. an increase in the natural rate of unemployment - an increase in the natural rate of unemployment (NRU) implies that more workers are now unemployed. With fewer workers, the supply of goods and services will fall. This will shift the SRAS to the left.

a. An increase in the interest rate will reduce the demand for investment goods and will impact aggregate demand for goods and services and not aggregate supply. This thus shifts the AD curve but not the SRAS curve.

c. A decrease in the expected price level will cause firms to bargain for lower wages with workers. Once workers agree to the lower wages, firm's cost of production falls, leading to an increase in the aggregate supply of goods and services. This causes the SRAS curve to shift to the right.