Determine whether each of the following, other things held constant, would lead to an increase, a decrease, or no change in long-run aggregate supply:
a. An improvement in technology
b. A permanent decrease in the size of the capital stock
c. An increase in the actual price level
d. An increase in the expected price level
e. A permanent increase in the size of the labor force
Take a shot, I or someone else will critique your thinking. Hint: two of the answers, i believe, are movements along the long-run aggregate supply curve rather than a shift in the curve.
a. An improvement in technology: An improvement in technology generally leads to an increase in long-run aggregate supply. This is because technology enhances productivity and efficiency, allowing firms to produce more output with the same amount of inputs. The increased output capacity leads to an outward shift of the long-run aggregate supply curve.
b. A permanent decrease in the size of the capital stock: A permanent decrease in the size of the capital stock would result in a decrease in the long-run aggregate supply. The capital stock refers to the quantity and quality of physical capital, such as machinery and equipment, available for production. A decrease in the capital stock reduces the productive capacity of the economy, leading to a leftward shift of the long-run aggregate supply curve.
c. An increase in the actual price level: An increase in the actual price level (inflation) does not impact the long-run aggregate supply directly. In the long run, the economy operates at its potential output level, which is determined by underlying factors. In this case, the actual price level only reflects the changes in the price level but does not affect the productive capacity or potential output of the economy. Therefore, it does not lead to a shift in the long-run aggregate supply curve.
d. An increase in the expected price level: An increase in the expected price level can influence the long-run aggregate supply. If firms and workers expect prices to rise in the future, they may anticipate higher costs of production. As a result, they demand higher wages and prices for their goods and services, leading to higher production costs. This expectation can cause a leftward shift of the long-run aggregate supply curve due to the increase in production costs.
e. A permanent increase in the size of the labor force: A permanent increase in the size of the labor force typically leads to an increase in the long-run aggregate supply. An expanded labor force means there are more workers available to produce goods and services. With a larger workforce, the economy can potentially produce more output, resulting in an outward shift of the long-run aggregate supply curve.
Please note that my answers are based on economic principles, and the impact of each factor on long-run aggregate supply may be subject to empirical analysis and specific contextual factors.