1.3 Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Aggregate supply can be affected by various factors including production costs, labor availability, and technological advancements.

Question 2

Explain the relationship between aggregate supply and price level in the short run.

Answer 2

In the short run, the aggregate supply curve is upward sloping, indicating that as the price level increases, the quantity of goods and services supplied also increases.

This is due to fixed costs and prices of inputs; firms can increase output by utilizing existing resources more intensively.

Question 3

Explain the relationship between aggregate supply and price level in the long run.

Answer 3

In the long run, aggregate supply is vertical at the natural level of output, indicating that price level changes do not affect the quantity of goods and services supplied.

This reflects that, in the long run, all prices and wages are flexible and fully adjust to changes in demand.

Question 4

What causes shifts in the aggregate supply curve in the short run?

Answer 4

Short-run aggregate supply can shift due to changes in:
* Production costs
* Supply shocks
* Changes in expectations about future price levels.

A positive supply shock, such as a decrease in oil prices, would shift the curve to the right, increasing output.

Question 5

What causes shifts in the aggregate supply curve in the long run?

Answer 5

Long-run aggregate supply shifts due to:
* Changes in labor force
* Technological advancements
* Changes in capital stock.

For example, an increase in the labor force or improvements in technology can shift the curve to the right, indicating an increase in potential output.