Will an increase in interest rate cause short run aggregate supply to shift? Most business borrow for financing their purchases of raw material and capital etc. Shouldn't a interest rate rise cause cost of production to increase, therefore shifting SRAS to left? Thanks in advance.
Yes, however a supply shift as a result of interest rates can be (sticky).this is why after a stock drop, a recession can take 1 year- 18 months to occur. So when we look at economic indicators over the past year, the 10-year approaching 3% has not led to a reduction in aggregate supply. It may not be until FY 18 Q4 that we see a drop a significant drop in in supply. Supply and interest rates do not have a “flexible” relationship, but instead a “sticky” one in which supply may not drop immediately, but over time your answer is correct.