Quiz 10: Aggregate Supply and Aggregate Demand

Business

Aggregate supply shows the relationship between price level and real GDP level. Let us see the how the following changes affect the aggregate supply in India. U.S. firm move their calling handling, IT and data function to India. This will result in increase in supply as this would increase employment and hence aggregate supply. As there would be new capital and technology, the long run supply curve will also increase from LAS to LAS*. img img LAS LAS* SAS SAS* Fuel price rise This will result in fall in aggregate supply as the suppliers' cost would increase with quantity of supply. The short run supply curve will shift from SAS to SAS*. The long run supply will remain the same. The price would rise from P to P*. img img SAS* img img SAS P* P Wal-Mart and star bucks open in India. This will result in increase in supply as this would increase employment and hence aggregate supply. As there would be new capital and technology, the long run supply curve will also increase from LAS to LAS*. img img LAS LAS* SAS SAS* Universities in India increased the number of engineering students. This would result in increase in labor. The wage rate will fall as the labor increases. Firms would hire more labor at lower wage rate. And hence the supply would increase from SAS to SAS*. img img SAS img img SAS* P P* The money wage rate rises This would result fall in aggregate supply from SAS to SAS* as firm would hire less labor at higher wage rate. img img LAS SAS* img img SAS P* P The price level in India increases This would result in no change in short run aggregate supply as labor will demand wage rise. As price rises, the supply would increase but as the wage rate rises, the supply again falls. The effect remains the same.

Labor productivity is rising at a rapid pace in Country C and wages are rising at the similar rate. Real variables influence GDP; hence, increase in the productivity will lead to increase in GDP. When the potential GDP has increased thus will lead to increase in aggregate supply in the economy. The rise in the wages (which is nominal) is to compensate for the greater value added by the labor to output.

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