1. Determine the effect on short-run aggregate supply of each of the following events. Explain whether it represents a movement along the SRAS curve or a shift of the SRAS curve.
A rise in the consumer price index (CPI) leads producers to increase output.
This represents a movement along the SRAS curve because the CPI—like the GDP deflator—is a measure of the aggregate price level, the overall price level of final goods and services in the economy.
A fall in the price of oil leads producers to increase output.
This represents a shift of the SRAS curve because oil is a commodity. The SRAS curve will shift to the right because production costs are now lower, leading to a higher quantity of aggregate output supplied at any given aggregate price level.
A rise in legally mandated retirement benefits paid to workers leads producers to reduce output.
This represents a shift of the SRAS curve because it involves a change in nominal wages. An increase in legally mandated benefits to workers is equivalent to an increase in nominal wages. As a result, the SRAS curve will shift leftward because production costs are now higher, leading to a lower quantity of aggregate output supplied at any given aggregate price level.