Chapter 13.3, Problem 4R

To determine

To state: The effect of high taxes and interest rates on the aggregate supply.

Explanation of Solution

Aggregate supply is the total output of the producers and shows the quantity that can be supplied in an economy over a period of time. If there are high taxes, it will affect the profit of producers and the quantity supplied can decrease.

Interest rate affects the aggregate supply and cause a shift in aggregate supply curve. When the interest rates are low, lower costs of production are found and hence the aggregate supply increases. This causes a right shift in the aggregate supply curve. However, when the interest rates are high, costs of production get high and hence the aggregate supply decreases. This causes a left shift in the aggregate supply.

Economics Concept Introduction

Introduction:

Aggregate supply- The aggregate supply is the total output that can be made by the producers on the basis of rise and fall of the price level.The aggregate supply curve shows the relationship of the aggregate quantity supplied with the price level. The curve shows a positive relationship. As with the increase in price level of goods in an economy, more is the quantity of goods supplied, the slope goes upward.