Question : An increase in government regulations can lead to:
Option 1: Shift of the aggregate supply curve to the right
Option 2: Shift of the aggregate supply curve to the left
Option 3: Movement along the aggregate supply curve
Option 4: No change in the aggregate supply curve
Correct Answer:
Shift of the aggregate supply curve to the left
Solution : The correct answer is (b) Shift of the aggregate supply curve to the left.
An increase in government regulations can lead to a shift of the aggregate supply (AS) curve to the left. Government regulations, such as stricter labor laws, environmental regulations, or increased taxes on businesses, can increase production costs and create additional burdens on businesses.
When the costs of production increase due to regulatory requirements, businesses may face higher expenses in terms of compliance, hiring, or implementing environmentally friendly practices. As a result, their ability to produce goods and services at the previous level becomes constrained, leading to a decrease in potential output.
A shift to the left of the AS curve indicates a lower level of aggregate supply, as the economy's productive capacity is reduced. This can result in higher prices and lower levels of real output in the economy.
