Questions on Aggregate Supply

Essay by eunice88College, Undergraduate September 2006

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1. The aggregate supply curve shifts to the right because a slowdown in wages leads to a decrease in cost of production which consequently increases the total supply as firms are able to produce in a larger quantity since they are able to allocate more money for the production of goods and services. This brings to the fall in general price level as the rate of the persistent rise in general price level slows down and eases inflationary pressures accordingly. The interest rates remain low as the rate of inflation is low.

2. The reduction in inflationary expectations would be a major factor in the decline of wages growth because the income earners or wage earners would not demand for higher wages as they expect the rate of inflation would be lower in the future thus they can still afford their living expenses without demanding for higher wages.

3. The overall competitiveness of Australia would drop if the decline in the private sector was greater than that of the public sector because private sector is stimulated by self-interest, private initiative and profit motive thus private sector would introduce a greater variety and volume of products in order to attract consumers to purchase their products. The profit motive acts as a powerful incentive for private sector to undertake research and development as well as innovation to increase efficiency in production. The existence of private sector would be a threat to the public sector because consumers will direct their expenditure to the goods and services provided by the private sector for the fact that private sector provides better quality of goods and services. Therefore, the public sector would have to improve the quality of goods and services in order to remain in the market. Hence, a greater decline in the private sector than the public sector would decrease the overall competitiveness of Australia.