The diagram below shows an Aggregate Supply and Aggregate Demand (AS–AD) model.

Initially, the economy is at equilibrium E₁, where AD₁ intersects SRAS₁ and LRAS.

Then the short-run aggregate supply (SRAS) curve shifts leftward to SRAS₂, creating a new equilibrium E₂ with a higher price level and lower real GDP.

What would most likely cause this leftward shift of the short-run aggregate supply curve?

Question

The diagram below shows an Aggregate Supply and Aggregate Demand (AS–AD) model.

Initially, the economy is at equilibrium E₁, where AD₁ intersects SRAS₁ and LRAS.

Then the short-run aggregate supply (SRAS) curve shifts leftward to SRAS₂, creating a new equilibrium E₂ with a higher price level and lower real GDP.

What would most likely cause this leftward shift of the short-run aggregate supply curve?

BlackTom AI · Accepted Answer

To analyze what could cause the SRAS curve to shift left, consider what SRAS represents: the total production at each price level given input costs and production technology. 
Option 1: 'An increase in consumer confidence leading to higher spending.' This affects aggregate demand (AD), not short-run aggregate supply. Higher consumer spending shifts AD right, raising both price level and real GDP in the short run, but it does not move SRAS itself. 
Option 2: 'A rise in production costs, such as higher wages or energy prices.' This directly increases the cost of producing goods and services. When input costs rise, firms supply less at any given price, so the SRAS curve shifts left. This is the classic cause of a leftward SRAS shift and a higher price level with lower output. 
Option 3: 'A fall in input prices, such as lower oil prices.' Lower input costs reduce production costs, encouraging more production at each price level. This would shift SRAS to the right (not left) and increase real GDP, while lowering the price level. 
Option 4: 'A decrease in the money supply by the central bank.' A tighter money supply primarily affects nominal variables by influencing aggregate demand through interest rates. It tends to shift AD left rather than SRAS, leaving the SRAS curve in place. 
Therefore, the only option that correctly describes a leftward shift in SRAS is the rise in production costs (Option 2).

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