Answer to Question #102190 in Macroeconomics for sandeep

Question

Draw an aggregate demand/aggregate supply diagram where equilibrium occurs below full employment level of output. Now show the impact of a leftward shift in the aggregate supply curve. What developments might cause such a shift?

Answer 1

Increases in the input price cause the aggregate supply curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will reduce the possibilities for earning profits.