Definition
- Business taxes and subsidies
- Business taxes and subsidies change what firms pay to produce: a higher indirect tax or payroll tax shifts SRAS left, and a subsidy shifts it right.
Example
Can you think of an example of business taxes and subsidies?
The government raises the rate of employer National Insurance contributions, a tax firms pay on each worker they employ. Hiring costs more at every price level, so SRAS shifts left.
Test yourself
Can you name the five things that shift short-run aggregate supply?