2.3 AGGREGATE SUPPLY

Question 1

facts about the keynsian curve

Answer 1

no dispute over how the curve shifts,

-there is a point where the economy is producing less than Yfe

-bends due to the level of spare capacity (it is possible to increase production without an increase in inflation as before there is excess capital and labour which is not yet being used)

-The closer we get to Yfe we will get to a point where we are using all of the factors of production

Question 2

LRAS shifts due to the quality and quantity of the factors of production

(if it improves it shifts to the righ)
(what causes a shift in LRAS?

Answer 2

-Investment (new machines being brought, new vehicles,)

-Labour productivity

-Quantity of labour (immigration incentives)

-Infrastucture (transport)

-New resource doscoveries

-Competition

Question 3

why is LRAS vertical

Answer 3

The LRAS is vertical because,in the long-run, the potential output an economy can produce isn’t related to the price level

Question 4

SRAS (diagonal)

costs of production (supply side shocks)

Answer 4

(if costs of production increase then there will be a shift to the left as there is less supply)

Wages - if wages go up, costs of production will shift to the left

Raw material - if costs of raw materials rise then sras will shift to the left

Oil price

Business taxes (VAT)

Import prices (SPICED/WIDEC)