04 Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

The total output of goods and services that producers in an economy are willing and able to supply at a given price level, in a given period of time

Question 2

Explain the short run aggregate supply curve

Answer 2

Price of inputs like labour and raw materials remain unchanged.

Curve upwards from left to right
At higher prices firms can cover extra wage costs and increase output. Willing to supply more at a higher price

Question 3

What is short run and long run?

Answer 3

Short run - Period where at least one factor of production is fixed

Long run - Period where all factors of productions are variable and technological change is possible

Question 4

What is the classical long run aggregate supply?

Answer 4

Non inflationary growth when it increases

Classical economists believe this is the only way to increase output as an increase in AD will simply lead to higher inflation

Vertical line

Question 5

What is the Keynesian long run aggregate supply?

Answer 5

The economy has spare capacity and can produce more using under-utilised factors of production. Increase in does not affect prices

Spare capacity is used up and increases in output lead to higher costs (wages) and a rise in price level

Beyond Yf is not possible to increase output as the economy is utilising all resources fully. Only price increases

Curve into vertical line