10.5 Dterminants Of Short-run Aggregate Supply

Question 1

Diagram for how an increase in aggregate demand affects real national income and the price level

Answer 1

Question 2

What are the main determinants of the SRAS curve?

Answer 2

Price level and production costs

Question 3

What will shift the SRAS curve?

Answer 3

Changes in costs such as wages, raw materials, business taxation and productivity

Question 4

What happens when the AD curve moves from AD1 to AD2?

Answer 4

Real output is proportionally greater than the increase in price level, real income increases from Y1 to Y2 and price level increases from P1 to P2

(Because the AD curve is shifting allowing the shallow part of the AS curve)

Question 5

What is a result of AD3 to AD4 on the steeper part of the AS curve?

Answer 5

Most of the effect of the increase of AD falls on the price level rather than on real output

(Effect is inflationary rather than deflationary)

Question 6

Where is full employment level of real income on the diagram?

Answer 6

YFE

Question 7

What happens if AD increases past the YFE point?

Answer 7

Results solely in a price rising or inflation, real income cannot increase is running at full capacity

Question 8

Diagram for a rightward shift of SRAS curve

Answer 8

Caused by a shift in the determinants of AS other than price level

Question 9

What factors cause a rightward shift of the SRAS curve?

(5 asp)

Answer 9

-fall in business cost of production (costs of imported raw materials and energy)

-fall in unit labour costs (lower wages or increased labour productivity)

-reduction in taxes such as VAT imposed on firms by gov

-increase in subsidies granted to firms by the gov

-technical progress which improves the quality and productivity of capital goods

(Leftward shift caused by the opposite)