A fall in the prices of inputs will shift the aggregate demand curve.

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A fall in the prices of inputs will shift the aggregate demand curve to the right. This means that at any given price level, there is a larger quantity demanded. A reduction in input prices will cause consumers and producers to increase their level of economic activity as they buy more goods and services.

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For example, if the price of a barrel of oil falls from $100 to $50 per barrel, consumers will buy more gasoline because it is cheaper. Producers who would be able to profitably produce at these new prices may also invest more in production. This raises output and employment levels as well.

The shift in aggregate demand caused by lower input prices can cause an economic expansion or boom period. The opposite effect will occur with higher input costs: firms have less incentive to produce goods which makes them reluctant to hire workers or purchase capital equipment that might not be needed when inputs are expensive. This leads to reduction in consumer spending and investment expenditures, so there is a contractionary shock-type response.)


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