Costly Rules Repealed
The question
Assume the economy of Norlund is initially in long-run equilibrium. The legislature repeals a set of paperwork and compliance requirements that had forced firms in every industry to devote costly staff time to each unit of output they produced. Assume the economy's quantity of resources and its level of technology are unchanged. Show only the short-run effect on Norlund's economy, holding all else constant. Show the effect on the AD-AS Model graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Costly Rules Repealed: the worked answer
On the AD-AS Model graph, SRAS shifts right.
Why SRAS shifts right
Government regulation that adds to the cost of producing each unit is a determinant of short-run aggregate supply. Removing the compliance burden lowers firms' per-unit production costs, so at every price level firms are willing to supply more output and short-run aggregate supply shifts to the right. The repeal puts no additional income in households' hands and does not change government purchases, so no component of aggregate demand changes, and the prompt holds resources and technology fixed, so long-run aggregate supply does not move.
What happens to the equilibrium
The equilibrium price level falls and real GDP rises above full-employment output in the short run.
The mistake students make on this one
Students often shift AD right instead, on the general sense that deregulation is good for the economy. Nobody's spending plans changed here; what changed is the cost of producing a unit, and an AD answer would push the price level up when this event pushes it down.
On exam day
When a policy lands on firms' cost of production rather than on anyone's spending, it is an SRAS event, and the tell is that the price level and real GDP finish moving in opposite directions.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when SRAS shifts right and every other curve on the AD-AS Model graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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