2.3 Aggregate Supply

Question 1

Why did Keynes believe wages were sticky downwards

Answer 1

• union power
• businesses are unwilling to risk demotivation
• workers are unwilling to work for too low
• the minimum wage means wages cannot fall below a certain level

Question 2

When there is high unemployment (anything under A) what do firms do

Answer 2

They do have to offer high wages to attract staff as the LRAS is perfectly elastic at this point

Question 3

What happens between points A and B on the Keynsian LRAS

Answer 3

Labour becomes scarcer so firms have to offer higher wages

These higher wages lead to a higher average price level.

Output becomes more price inelastic until it reaches point B, where an increase in prices no longer affects output as the PPF has been reached.

Question 4

What are 6 main factors that influence LRAS

Answer 4

1. Technological Advance
2. Changes in relative productivity
3. Changes in education and skill
4. Changes in Government Regulation
5. Demographic Changes and migration
6. Competition Policy

Question 5

How do technological advances influence LRAS

Answer 5

• More machines means more goods can be produced or more efficiectly
• Increasing the LRAS

Question 6

How do changes in relative productivity influence LRAS

Answer 6

• Higher productivity increases the production possibility
• if the UK is more productive than other countries it will encourage production of that good in the UK, so investment will be increased, and this will increase LRAS

Question 7

How do changes in education and skills influence the LRAS

Answer 7

• A more skilled workforce will be more efficient which will shift the LRAS
• Education can reduce occupational immobility which decreases structural immobility so resources are used efficiently

Question 8

How do changes in government regulation influence the LRAS

Answer 8

1. Increase the size of the workforce by encouraging people to get back in (benefits and working age reduced)
   2.Increase research and development ; offer tax breaks to fund
   3.Increase incentives to set up businesses; entrepreneurial zones and lower coporation tax

Question 9

How do demographic changes and migration influence the LRAS

Answer 9

• The more migration the higher the LRAS
• The more of that migration is working age the better

Question 10

How does competition policy influence LRAS

Answer 10

• Competition pushes buisness to both improve efficiency and quality of their products so LRAS will increase
• Less competition however can encourage investment and innovation (copyright laws and patents)