2.3 Aggregate Supply

Question 1

Define aggregate supply

Answer 1

The total amount of goods and services supplied by firms within an economy at a given price level over a given period of time

Question 2

Describe a classical SRAS diagram (3)

Answer 2

• X-axis: real GDP (Y)
• Y-axis: price level (PL)
• the SRAS curve is upwards sloping (positive relationship between the PL and the output firms are willing to supply)

Question 3

Describe a classical LRAS diagram (3)

Answer 3

• X-axis: real GDP (Y)
• Y-axis: price level (PL)
• the LRAS curve is vertical (no relationship)

Question 4

What does classical SRAS show?

Answer 4

Short-run aggregate supply shows the total planned output when prices can change but the factors of production are fixed (in the short run)

Question 5

What does classical LRAS show?

Answer 5

Long-run aggregate supply shows the output that an economy can produce when using all its factors of production (full employment of resources)

Question 6

What causes a movement along the classical SRAS curve?

Answer 6

A change in the price level
- rise in the PL = extension in AS
- fall in the PL = contraction in AS

Question 7

What causes a shift in the classical SRAS curve?

Answer 7

1. Costs of production (wages, commodity prices, exchange/taxation rate changes)
2. Productivity

Question 8

Define productivity

Answer 8

The amount of output produced compared to the input (e.g. time, energy, resources)

Using the same amount of input to achieve an increased level of output means that productivity has risen

Question 9

Why is the classical LRAS curve vertical?

Answer 9

This represents the maximum level of output that the economy is producing at in the long run, with full employment of resources

This also means that a change in price cannot stimulate a change in output (maximum level already reached)

Question 10

What causes a shift in the classical LRAS curve?

Answer 10

1. Quantity and quality (productivity) of the factors of production
2. Productive efficiency of the economy

Question 11

What does the Keynesian AS curve show?

Answer 11

The Keynesian AS curve shows the economy not always being at full employment and how the economy uses its resources, which puts inflationary pressures to reach its full potential level of output

Question 12

Describe a Keynesian AS diagram

Answer 12

• X-axis: real GDP (Y)
• Y-axis: price level (PL)
• the AS curve is upwards sloping with YFe being labelled on the x-axis when the curve is vertical

Question 13

What does the horizontal section of the Keynesian AS curve represent?

Answer 13

Price elastic section:
- low levels of output
- larger amounts of spare capacity
- possible to increase output without putting an upwards pressure on the price level (spare capacity can be used)

Question 14

What does the upwards curving section of the Keynesian AS curve represent?

Answer 14

• fewer unemployed resources
• increased costs of production
• output can still be increased as some spare capacity still exists
• upwards pressure on prices (higher wages are offered to workers to compensate for increased output)

Question 15

What does the vertical section of the Keynesian AS curve represent?

Answer 15

Price inelastic section:
- full employment of resources (no spare capacity)
- impossible to increase output unless significant upwards pressure is put on unit wage costs and prices

Question 16

What causes a shift in the Keynesian AS curve?

Answer 16

1. Quantity and quality (productivity) of the factors of production
2. Productive efficiency of the economy
3. Costs of production