An increase in input productivity will
A) shift the aggregate supply curve leftward.
B) reduce the equilibrium price level, assuming downward ﬂexible prices.
C) reduce the equilibrium real output.
D) reduce aggregate demand.

Question

Quizplus · Accepted Answer

An increase in input productivity will reduce the cost of production, leading to a decrease in the equilibrium price level if prices are downward flexible. This is because firms can produce the same output at a lower cost and compete by passing on those cost savings to consumers. The aggregate supply curve does not shift leftward since there is no decrease in the quantity supplied at any given price level. The equilibrium real output does not necessarily decrease since firms may be able to produce more with the same inputs, increasing the quantity supplied. Aggregate demand does not necessarily decrease since an increase in input productivity could increase profitability and lead to increased investment and consumption spending.

An Increase in Input Productivity Will