Question

For each of the following scenarios, determine the effect on aggregate supply.

a. There is an unexpected decrease in oil prices.

___ This will cause a movement along the aggregate supply curve to the left, showing a decrease in the quantity of real GDP supplied.

___ This will cause a decrease in aggregate supply, shifting the aggregate supply curve to the left.

___ This will cause an increase in aggregate supply, shifting the aggregate supply curve to the right.

___ This will cause a movement along the aggregate supply curve to the right, showing an increase in the quantity of real GDP supplied.

b. Suppose the government increases the amount that all producers are required to contribute to health insurance coverage

___ This will cause a movement along the aggregate supply curve to the right, showing an increase in the quantity of real GDP supplied.

___ This will cause a decrease in aggregate supply, shifting the aggregate supply curve to the left.

___ This will cause a movement along the aggregate supply curve to the left, showing a decrease in the quantity of real GDP supplied.

___ This will cause an increase in aggregate supply, shifting the aggregate supply curve to the right.

Answer 1

(a) Option (c) is correct.

(b) Option (b) is correct.

Step-by-step explanation:

(a) If there is an unexpected decrease in the oil prices (Positive supply shock) then as a result this will reduce the cost of production of the firms and hence, there is an increase in the supply of the goods. This will shift the aggregate supply curve rightwards.

(b) If all the producers are required to contribute more towards the heath insurance coverage (negative supply shock) then as a result this will increase the cost of production of the producers. So, this will lead to decrease the supply of the goods and also, shift the supply curve leftwards.