Which of the following factors would be most likely to lead to an increase in aggregate supply (AS) for an economy?

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BlackTom AI · Accepted Answer

Question restatement: We’re asked which factor would most likely cause the aggregate supply (AS) curve to increase.
Option a: A decrease in the rate of business taxation. This reduces firms’ costs and/or increases after-tax profits, incentivizing production and encouraging investment in capital and technology. In the AS framework, lower taxes shift the short-run and potentially long-run AS curves to the right, reflecting greater production capacity and efficiency. This is a classic supply-side improvement.
Option b: A decrease in population. Fewer workers generally reduce potential output and productive capacity, which would shift the AS curve to the left rather than to the right, making this option unlikely to increase AS. It tends to limit aggregate supply rather than expand it.
Option c: A decline in business confidence. If firms are less confident, they’re more likely to scale back investment and hiring, which reduces productive capacity in the economy over time. This would shift AS to the left, not increase it, so it’s not supportive of higher AS.
Option d: An increase in the central bank’s official cash rate. A higher policy rate tends to raise borrowing costs, dampen investment, and can slow production growth. This typically reduces AS in the short run and does not promote an increase in aggregate supply.
Synthesis: Among the four options, only a decrease in business taxation (option a) directly lowers production costs or boosts after-tax profits, enabling more output and shifting AS to the right. The other choices either reduce the economy’s productive capacity or raise the cost of financing, both of which would hinder aggregate supply rather than increase it.

MUF0062 Economics Unit 2 - Semester 2, 2025 Revision Quiz - Aggregate Supply and Macroeconomic Equilibrium (10 - 15 minutes)

Which of the following factors would be most likely to lead to an increase in aggregate supply (AS) for an economy?

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