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IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses

On a standard AD-AS diagram, a successful supply-side policy is shown by which of the following, other things being equal?

A successful supply-side policy shifts long-run aggregate supply to the right. With aggregate demand unchanged, equilibrium real output rises and the general price level falls, reflecting the economy's higher productive capacity and lower unit costs.

  1. AA rightward shift of LRAS, giving higher output and a lower price levelCorrect
  2. BA leftward shift of LRAS, giving lower output and a higher price level
  3. CA rightward shift of aggregate demand only, giving higher prices
  4. DA movement up along a fixed short-run aggregate supply curve
  5. A vertical shift of LRAS with no change in potential output

Explanation

Greater capacity moves the aggregate supply curves to the right. With AD unchanged, equilibrium output rises and the price level falls. A leftward shift would signal reduced capacity, which is the opposite of the policy's aim.

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