Question 43

Lower oil prices will cause a rightward shift of the aggregate supply curve.

A decrease in oil prices reduces production costs for businesses, leading to an increase in aggregate supply. This shift occurs because lower input costs allow firms to produce more goods at existing price levels.

A) Economy wide large increases in wages

Large increases in wages generally lead to higher production costs for businesses. As wages rise, firms may reduce their supply due to increased expenses, which would result in a leftward shift of the aggregate supply curve, not a rightward one.

B) Lower oil prices

Lower oil prices decrease the cost of energy and transportation, which are significant components of production costs. This reduction in costs encourages firms to increase their output, leading to a rightward shift of the aggregate supply curve.

C) Stricter government regulation

Stricter government regulation often imposes additional compliance costs and operational constraints on businesses. This typically results in a decrease in aggregate supply, causing a leftward shift in the aggregate supply curve rather than a rightward shift.

D) Increased investment spending

While increased investment spending can enhance productive capacity and lead to long-term growth, its immediate effect does not guarantee a rightward shift in the aggregate supply curve. It may take time for the benefits of such spending to materialize in terms of increased output.

Conclusion

Lower oil prices are the primary factor that will cause a rightward shift in the aggregate supply curve by reducing production costs, whereas the other options either increase costs or do not have an immediate effect on supply. Thus, option B is the only correct choice, as it directly contributes to an increase in supply.