The price of gasoline has fallen recently which has lowered shipping costs for m

Question

The price of gasoline has fallen recently which has lowered shipping costs for most of the inputs firms use. Determine how this would affect aggregate demand (AD) and/or short-run aggregate supply (SRAS) and the effect that would have on the aggregate price level (PL) and aggregate output (real GDP).

            AD would (increase, decrease, stay the same) ____________

            SRAS would (increase, decrease, stay the same) ____________

            The PL would (increase, decrease, stay the same) ____________

            Real GDP would (increase, decrease, stay the same) ____________

Explanation / Answer

(a) AD would stay the same.

Lower cost of inputs is a supply-side factor that doesn't affect AD in short run.

(b) SRAS would increase.

Lower shipping cost will encourage firms to increase output and this will increase SRAS.

(c) Price level would decrease.

Higher aggregate supply will shift SRAS rightward which will lower the price level.

(d) Real GDP will increase.

As SRAS shifts rightward, real GDP rises.

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