The aggregate supply curve wasconstructed assuming that as the price ofout puts

Question

The aggregate supply curve wasconstructed assuming that as the price ofout puts increases, the price of inputsstays the same. How would an increasein the prices of important inputs, likeenergy, affect aggregate supply?

Suppose the U.S. Congress passes significantimmigration reform that makes it easier forforeigners to come to the United States to work.Use the AD/AS model to explain how thiswould affect the equilibrium level of GDP andthe price level.   

Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?

Aggregate demand models..Macroeconomi

Explanation / Answer

1. An increase in the price of important inputs will raise the cost of production for producers, thereby making it costly to produce more and more units of output and thus less profits. Hence, producers will start producing less so as to reduce earning less profits. This will lead to a shift in the AS, shifting the AS curve to the left.

2. With more foreigners entering the economy, number of consumers will increase in the economy. This will mean more people demanding goods and services, thereby increasing AD and shifting the AD curve to the right. This will lead to increased output and prices.

3. As technology growth falls, production becomes less efficient. This leads producers to produce less, shifting the AS curve to the left. This leads to increased prices and reduced output.

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