2.3 Aggregate Supply

Question 1

Define Aggregate Supply

Answer 1

the total supply of goods/services produced within an economy at a specific price level at a given time period

Question 2

Why is the AS curve upwards sloping

Answer 2

1) as real output increases, firms have to spend more to increase production (higher costs are passed on as higher prices)

2) AS is the combined supply of all individual supply curves in an economy which are also upwards sloping

Question 3

Movement along the SRAS curve

Answer 3

When there is a change in the average PL in an economy there is a movement along

expansion or contraction

Question 4

Shift in the SRAS

Answer 4

When the conditions of the economy change there is a shift

i.e cost of production, productivity

Question 5

State the 3 factors influencing SRAS (be able to explain how these affect the curve)

Answer 5

1. change in costs of raw materials and energy
2. change in exchange rates
3. changes in tax rates

Question 6

Explain the factors influencing SRAS

Answer 6

increased COP, fewer g/s can be made for the same amount of money, SRAS left

Appreciation, SPICED, lower cost= more ouput, SRAS right

Increased in tax, higher COP, high tax=less output. SRAS left

Question 7

What is LRAS influenced by

Answer 7

LRAS is influenced by a change in the productive capacity of the economy (changes in the quality/quantity of FoP)

Question 8

Classical LRAS

Answer 8

[inelastic curve]
LRAS is perfectly inelastic at a point of full employment of all available resources, corresponding to the max output point on a PPF
Believes the economy will always return to this point

Question 9

Keynsian LRAS

Answer 9

[J shaped]
Supply is elastic at lower output levels as there is lots of spare capacity.

Supply is perfectly inelastic at the point of full employment of all available resources

The economy will not always self-correct and return to the full employment level

There is a role for the govt to increase expenditure to shift LRAS

Question 10

6 factors influencing LRAS

Answer 10

1. technological advances
2. changes in relative productivity
3. changes in education and skills
4. changes in govt regulations
5. demographic changes and migration
6. competition policy

Question 11

Explain the factors influencing LRAS

Answer 11

factors which improve quality/quantity of FOP shift S right

tech advances: improve quality of FOP
C in relative productivity: innovation = more productivity
C in edu/skills: increases quality of labour
C in govt reg: improve quantity of FoP
demographic C: +ve net birth or net migration, increased labour available
Comp policy: prevent monopoly power