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Which of the following would have an impact on aggregate supply?  1. A decrease in...

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martairobert | (Level 1) Salutatorian

Posted February 10, 2013 at 9:44 PM via web

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Which of the following would have an impact on aggregate supply?  1. A decrease in real interest rates paid by the consumer. 2. An increase in labor productivity as a result of a better educated population

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted February 10, 2013 at 9:52 PM (Answer #1)

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Of these two options, only #2 will have an impact on aggregate supply (AS).  Option #1 will have an impact on aggregate demand (AD).  Both of these options will cause an increase in its respective measure.

Aggregate supply is the value of goods that can and will be produced in a country’s economy at a given price level.  This will not be affected by a decrease in real interest rates that consumers pay.  If consumers get lower interest rates, they are more likely to buy things.  This will lead to an increase in AD, but it will not affect AS.  AS is affected mainly by changes in the ability of an economy to produce goods and services.  What this means is that AS will rise if an economy gets more resources which it can use to produce things.  When the workforce becomes more educated, the level of human resources in the economy rises.  The workforce becomes more productive and so more goods and services can be produced.  This leads to an increase in AS.

Therefore, only one of these will have an impact on AS.  An increase in labor productivity will increase AS.  By contrast, a reduction in consumer interest rates will increase AD.

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