2.3 aggregate supply

Question 1

What is aggregate supply?

Answer 1

• shows the quantity of real GDP which is supplied at different price levels in the economy

Question 2

Why does the SRAS curve slope upwards?

Answer 2

• slopes upwards because at a higher price level, producers are willing to supply more because they can earn higher profits when selling at a higher price

Question 3

How does AD affect the AS curve?

Answer 3

• only changes in the price level, which occur due to changes in AD, lead to movement along the AS curve
• if AD increases, there is an EXPANSION in the SRAS
  If AD falls, there is a CONTRACTION in the SRAS curve

Question 4

When does the SRAS curve shift?

Answer 4

• when there are changes in the conditions of supply e.g. changes in the cost of production, taxes or subsidies, changes in the price of other goods, changes in technology, govt. policy

Question 5

What is the difference between the long run and short run? What does SRAS show?

Answer 5

• the short run is the period of time where at least one factor of production is fixed, whilst in the long run all factors are variable
• the SRAS only covers the period immediately after a chance in the price level -> shows the planned output of an economy when prices change, while the cost of production and productivity are kept constant (resulting in a shift of the curve)

Question 6

What does LRAS show?

Answer 6

• shows the potential supply of an economy in the long run -> when prices, and costs and productivity of factor inputs can change
• similar to PPF, it can show the economy’s productive potential
• in the CLASSICAL model, the curve is vertical because supply is not assumed to change as the price level changes.

Question 7

What are the the features of the Keynesian LRAS curve?

Answer 7

• suggests that the price level in the economy is FIXED until all the resources are fully employed - horizontal section is when there is SPARE CAPACITY in the economy: resources are not fully employed
• when there is spare capacity, an increase in output would not be inflationary as it wouldn’t affect price level BUT once full employment (Yfe) is reached then an increase in output would be inflationary

Question 8

What are the features of the neoclassical LRAS curve

Answer 8

• suggests that output is fixed is fixed at each level of production -> this means that changing AD only makes a change to the price level and it will not change national output

Question 9

Which factors affect LRAS?

Answer 9

Influenced by changes which affect the quantity or quality of the factors of production -> an increase in the number or goods/services produced = outwards shift of LRAS
- improvement of tech
- changes in relative productivity
- changes in govt regulation e.g. increase in red tape, which limits productivity and efficiency of a firm
- changes in education and skill, which improves productivity + innovation
- demographic changes and migration: size of the labour force will increase
- competition policy, which will encourage the forms to be more efficient and productive

Question 10

Is there a possibility of ever being above full employment?

Answer 10

• overtime - when workers work more than they need to and producer a higher output for a higher wage
• however, this is not sustainable in the long run because the cost of production increases greatly so AS decreases eventually

Question 11

What is a supply shock?

Answer 11

• an event or occurrence like a natural disaster than may cause a shock to the country’s national output

Question 12

Why is there no unemployment in the classical theory of AS?

Question 13

What is LRAS?