How do subsidies impact aggregate supply?

Subsidies are financial assistance provided by the government to businesses or industries to encourage production and investment. When businesses receive subsidies, they effectively reduce their production costs, making it more affordable for them to produce goods and services. This decrease in production costs can lead to an increase in aggregate supply because businesses can produce more at a lower cost, thereby enhancing their ability to meet consumer demand.

Furthermore, lower production costs can incentivize businesses to expand their operations or invest in new technologies, further boosting their productivity. As aggregate supply increases, it can lead to lower prices for consumers and potentially stimulate overall economic growth. Thus, the impact of subsidies on aggregate supply is largely positive, as they aim to enhance production efficiency and capacity across various sectors.