Question : Statement 1: An increase in imports will lead to a shift in aggregate demand.
Statement 2: An increase in production costs will lead to a shift in aggregate supply.
Which statement is correct?
Option 1: Only Statement 1
Option 2: Only Statement 2
Option 3: Both Statement 1 and Statement 2
Option 4: Neither Statement 1 nor Statement 2
Correct Answer: Only Statement 2
Solution : The correct answer is (B). Only Statement 2 is correct.
Statement 1: An increase in imports will not lead to a shift in aggregate demand. This is because imports are not part of aggregate demand. Aggregate demand is the total amount of spending by consumers, businesses, government, and foreigners on domestically produced goods and services. Imports are goods and services produced in other countries. When consumers, businesses, government, or foreigners buy imports, they are not spending money on domestically produced goods and services. As a result, an increase in imports does not affect aggregate demand.
Statement 2:An increase in production costs will lead to a shift in aggregate supply. This is because production costs are a determinant of aggregate supply. Aggregate supply is the total amount of goods and services that producers are willing and able to supply at different price levels. When production costs increase, it makes it more expensive for producers to produce goods and services. This leads to a lower level of output and income, which in turn leads to lower prices. As a result, the aggregate supply curve shifts to the left.