Question

What happens to the aggregate supply (AS) curve in Xurbia when input prices within its agricultural sector increase?

a. It shifts the AS curve to the right
b. It shifts the AS curve to the left
c. It has no effect on the AS curve
d. It depends on other economic factors

Answer 1

An increase in input prices in Xurbia's agricultural sector causes the aggregate supply curve to shift to the left, indicating a lower quantity of real GDP supplied at each price level, which can lead to stagflation.

Step-by-step explanation:

When input prices within the agricultural sector increase in Xurbia, it leads to a shift in aggregate supply (AS) curve to the left. This is because the rise in input costs means that at any given price level, producers will supply a lower quantity of real GDP. This is in line with the principles detailed in the AD/AS diagram, where higher prices for key inputs, such as those in the agricultural sector, result in a decreased quantity of output and hence a leftward shift in the AS curve, bringing about a new equilibrium with possibly higher price levels and lower output, known as stagflation.