15. AS

Question 1

Define aggregate supply

Answer 1

AS: the total amount of goods and services that all industries in an economyproduce at every given price level

Question 2

Define short-run

Answer 2

SHORT-RUN: the period of time when the prices of the factors of production dont change - price of labour (wages) dont change

Question 3

Increase of output in the short-run

Answer 3

If producers want to increase output in the short-run -> have to pay “over-time wages” to workers as other factors of production might not be increased rapidly - costs of production increase - movement along AS - production at higher price level

Question 4

Factors that cause shifts in AS

Answer 4

Factors that change costs in production:

• change in wage rates
• change in the cost of raw materials
• change in the price of imports
• change in indirect taxes/subsidies

Question 5

Types of long-run AS

Answer 5

New-classical (monetarist)

Keynesenian

Question 6

Explain new-classical AS

Answer 6

Monetarists believe in power of market forces - support as little gov intervention in resource allocation

LRAS perfectly inelastic - is at full employment level of output (potential output that could be produced if the economy was operating at full capacity) - Y_f

Potential output is based on quality and quantity of factors of production - not the price level

Question 7

Explain Keynesian LRAS

Answer 7

Keynesian shows 3 possible phases:

1. Perfectly elastic at low levels of economic activity - high amounts of unused factors of production
2. Output approaches potential - Y_f - spare caapcity of factors is used up - become scarce - price lvel increases
3. Economy reaches full capacity Y_f - factors of production fully employed - LRAS perfectly inelastic - only shifts if there is increase in quality/quantity of factors of production

Question 8

Explain shifts in LRAS

Answer 8

When productive potential is increased - improvement in quanityty and/or quality of factors of production

LRAS shift to the right - PPC outwards shift

Question 9

Possible improvements in quality and increases in quantity of factors of production

Answer 9

Question 10

Government intervention for increasing LRAS

Answer 10

An increase in quality/quantity of factors of production by:

• interventionist policies
• market-based policies

Question 11

Explain interventionist supply side policies

Answer 11

• investment in human capital: improvement in labour force - human capital
• research and development: increase efficiency with new technologies/methods
• provisiona and maintainance of infrastructure: necessary for economic activity to take place
• direct support for businesses/ industrial policies: which encourage economic development - competitiveness, anti-monopoly laws, pro-exports

Usually time lag until improvement in LRAS is seen - also policies have demand side effects - AD increase due to increased gov spending

Question 13

Explain market-based supply side policies

Answer 13

Focus on allowing markets to operate more freely - try to increase incentives fro workers to work harder/firms invest more - higher output

• reduction in household income taxes
• reductions in corporate taxes
• labour market reforms: reduction of trade union power (decrease in workers’ protection/rights/incomes), reduction/elimination of minimum wages, reduction in unemployment benefits

reduction of living standards!!

• deregulation: decrease costs of production
• privatisation: provitely owned maximise profits - more efficient
• policies to increase competition: anti-monopoly laws, increase international trade