Economics • Economic BasicsMedium
How does an unexpected surge in domestic productivity growth impact the aggregate supply curve and the general price level in an open macroeconomic framework?
A. It shifts the aggregate supply curve to the left, causing higher inflation and lower real output
B. It shifts the aggregate supply curve to the right, leading to higher real output and downward pressure on prices✓ Correct Answer
C. It leaves aggregate supply unchanged while shifting the aggregate demand curve downward
D. It causes an immediate contraction in employment due to capital-labor substitution effects
💡 Solution & Explanation
An unexpected surge in productivity enhances efficiency across all industrial sectors, shifting the aggregate supply curve outward to the right, which expands real Gross Domestic Product while moderating general price inflation. Leftward shifts in aggregate supply are typically triggered by negative supply shocks such as severe oil price spikes or natural disasters. Unchanged supply curves would imply stagnant technological progress. Productivity enhancements generally boost long-term employment prospects rather than causing permanent structural contraction.
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