Which of the follwing events is MOST LIKELY to increase Short-run Aggregate suppy (i.e. shift the curve to the right) ? a) High unemployment puts downward pressure on money wages. b) An Increase in government spending intended to increase Real output. Ans: A How come? Thanks
High unemployment -> downward pressure on money wages -> costs less to produce -> more profit potential for a given level of demand -> boost supply to meet it. as for why b is wrong…government spending intended to increase real output is a demand side effect. you would see a shift in the demand curve, and no initial effects on the supply side. Shifts in supply curve may come at a lag, and would almost certainly be a shift to the left when/if it does occur as a result of increased inflation expectations. It will depend on the perception as to whether government spending is temporary or permanent.
I think wyantjs is right. The lower money wage rate increase the quantity of labor and therefore increase SAS. Answer A is correct. An increase in government spending is a demand side effect. The SAS would only be influenced indirectly by reacting to higher demand. Answer b is less correct. It is most often recommended to choose the most correct answer.