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What happens when short-run aggregate supply increases?


AThe economy experiences inflation without a change in output.
BThe price level decreases, and output increases.
CBoth price level and output remain constant.
DThe price level increases, and output decreases.

Verified Answer :

Final answer:

An increase in short-run aggregate supply leads to a decrease in the price level and an increase in output, beneficially impacting economic growth. Increased production can lower prices due to greater competition among businesses. Ultimately, this results in consumers benefiting from lower prices and higher availability of goods.


Explanation:

Impacts of an Increase in Short-Run Aggregate Supply


When the short-run aggregate supply (SRAS) increases, it generally leads to changes in the economy's overall price level and output. Here are the main effects:



  1. The price level decreases, and output increases.


This means that when businesses are able to produce more goods and services in the short run—often due to falling input costs or enhanced productivity—the overall supply of goods in the economy rises. As a result:



  • More products are available for consumers, which creates competition, leading to lower prices.

  • Consumers can buy more at lower prices, which boosts demand and results in higher output levels.


Therefore, an increase in short-run aggregate supply primarily favors economic growth with lower prices, which contrasts with scenarios where supply declines, leading to inflation and lower output.


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