Question

For each of the scenarios, please decide whether there will be an increase or decrease in short-run aggregate supply or if there will be no change.

1. Changes in the healthcare market cause employers to pay significantly more for health insurance they provide employees.
2. The price of lumber, a commodity, rises drastically due to the effect of heavy winter weather in the American Northwest, where much of the world's lumber is grown.
3. The production of a new type of blade for their combine harvesters, a tractor used to harvest crops, has allowed wheat farmers, like Herbert, to increase productivity by 40%.

WORD BANK
no change
short-run aggregate supply decreases
short-run aggregate supply increases

Answer 1

1) short-run aggregate supply decreases

2) short-run aggregate supply decreases

3) short-run aggregate supply increases

Step-by-step explanation:

An increase in the cost of employer provided health insurance means that firms are paying more for each unit of labor they employ. This is an increase in nominal wages (even if employees don't see this increase in their paychecks!). The result is that is it more expensive to produce so short-run aggregate supply will decrease or shift to the left. Similarly, the bad weather in the Northwest will reduce the availability of lumber and increase the price, making lumber more expensive at any amount. Because lumber is used extensively as an input into the production function, this too will result in a decrease in short-run aggregate supply.

In comparison, a rise in productivity will result in an increase in short-run aggregate supply. Because of the new technology, it now becomes cheaper for Herbert, and the other farmers like him, to produce at any quantity, and so they increase production. Such a shift occurs over the entire economy and will shift the short-run aggregate supply curve to the right.