2.3 - Short-run aggregate supply

Question 1

Factors influencing short-run AS

Answer 1

• changes in costs of raw materials and energy
• changes in exchange rates
• changes in tax rates

Question 2

Explain how changes in costs of raw materials and energy influence short-run AS

Answer 2

• Changes in the costs of raw materials and energy directly affect production costs for firms.

> An increase in cost of raw materials and energy increases the cost of production.
This means the SRAS curve will shift left as it will cost more to make the same amount of goods and therefore businesses will only produce this amount of goods if prices rise.

> Lower costs decrease production costs, shifting the SRAS curve to the right as it will cost less to make the same amount of goods and therefore businesses will increase their quantity supplied, increasing aggregate supply.

Question 3

Explain how changes in exchange rates influence short-run aggregate supply

Answer 3

• Exchange rates influence the cost of imported goods and services.

> A stronger domestic currency makes imports cheaper, reducing production costs.
so currency appreciation decreases production costs and SRAS shifts right

> A weaker domestic currency makes imports more expensive, increasing production costs.
so currency depreciation increases production costs and SRAS shifts left

Question 4

Explain how changes in tax rates influence short-run aggregate supply

Answer 4

• Changes in tax rates on businesses affect their cost structures and profitability.

> Higher tax rates increase costs of production, reducing quantity supplied by businesses and so aggregate supply falls and SRAS curve shifts left

> Lower tax rates decrease costs of production, increasing quantity supplied by businesses so aggregate supply increases and SRAS curve shifts right
Subsidies shift it the curve right as they decrease costs.