Question

Some say environmental regulations on businesses make production more costly. others argue that these regulations, though costly, also make producers look for opportunities to reduce waste in production processes and might result in a cleaner environment and better production processes. if this second point of view is correct, how do new regulations affect the economy?
a. regulations will lead to increased output without increasing the price level.
b. regulations will have an indeterminate effect on output and price levels.
c. regulations will increase aggregate supply.
d. regulations will increase aggregate demand.
e. regulations will lead to lower price levels without reducing output.

Answer 1

C.

If such policies cause the producers to adopt better production processes, we can assume that wastage is reduced and there is more output, therefore aggregate supply increases. The problem of its effect on the price level depends on where the economy is in regards to full employment, but we can say with assurance that output will increase.