Chapter 18, Problem 1CYU

a)

To determine

The effect on short-run aggregate supply for a rise in the consumer price index (CPI) leads producers to increase output.

Explanation of Solution

An increase in the consumer price index represents a movement in short-run aggregate supply because the producer gets an increase in aggregate output by charging high prices of consumer goods and services in the market. Therefore, an increase in CPI means an increase in the price level of goods, which in turn moves the short-run aggregate supply curve upward in correspondence to the higher level of equilibrium aggregate output.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.

b)

To determine

The effect on short-run aggregate supply for a fall in the price of oil leads producers to increase output.

Explanation of Solution

With the decrease in oil prices and increase in producers’ output, an aggregate supply curve will move because there would be lower production costs and the supply curve would shift to the right. This happens because a producer can sell a higher quantity at each level of price because the production cost of oil declines which means the market price would also reduce for each unit. Therefore, produced units will increase in the economy due to the increasing profitability of producing oil.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.

c)

To determine

The effect on short-run aggregate supply for a rise in legally mandated retirement benefits paid to workers leads producers to reduce output.

Explanation of Solution

When there is an increase in mandatory retirement benefits, the short-run aggregate supply curve would also shift because the recruitment or hiring cost of labor would increase. It causes disincentivizes producers and the short-run aggregate supply curve would shift to the left because producers will prefer to produce less at each level of price and they do not choose to supply more. Producers would do this so that they can retain their earlier profitability.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.