2.3.2 Short-Run Aggregate Supply

Question 1

What are the three main factors influencing Short-Run Aggregate Supply?

Answer 1

1. Changes in Costs of Raw Materials and Energy:
   Changes in the costs of raw materials and energy directly affect production costs for firms.
   Higher costs increase the overall cost of production, shifting the SRAS curve to the left.
   Lower costs decrease production costs, shifting the SRAS curve to the right.
2. Changes in Exchange Rates

Exchange rates influence the cost of imported goods and services.
A stronger domestic currency makes imports cheaper, reducing production costs.
A weaker domestic currency makes imports more expensive, increasing production costs.

3. Changes in Tax Rates

Changes in tax rates on businesses affect their cost structures and profitability.
Higher tax rates increase costs, reducing supply.
Lower tax rates decrease costs, increasing supply.

Question 2

What are some real-world examples to illustrate the impacts of different factors on Short-Run Aggregate Supply?

Answer 2

1. Raw materials and Energy: 2008 Oil Price Shock: The spike in oil prices led to increased costs for energy-dependent industries, shifting the SRAS curve leftward and contributing to global economic slowdown.
2. Changing exchange rates: Post-Brexit Pound Depreciation: The depreciation of the British pound after the Brexit referendum increased import costs for UK firms, shifting the SRAS curve to the left.
3. Changing tax rates: 2018 US Tax Cuts and Jobs Act: The reduction in corporate tax rates in the US lowered production costs for businesses, contributing to a rightward shift in the SRAS curve.