2.3 Aggregate Supply

Question 1

Aggregate supply

Answer 1

The volume of goods and services produced within the economy at a given price level

Question 2

Short run aggregate supply

Answer 2

The total supply of goods and services in an economy that are determined by costs. Assumes that at least three FOPs are fixed. More likely

Question 3

Long run aggregate supply

Answer 3

Where all factors of production are variable and an economy will run at full capacity of the economy and is perfectly elastic

Question 4

Infrastructure

Answer 4

The structure of the supply side

Question 5

Spare capacity

Answer 5

Where the FOPs are unemployed. Negative output gap where AD is less than full capacity.

Question 6

Full capacity

Answer 6

Where the FOPs are fully employed. Positive output gap where AD is operating on the bottle neck of AS

Question 7

Keynesian supply curve

Answer 7

Keynes believed in the long run, unemployment may persist and so the economy may be responsive to changes in aggregate demand

Question 8

Factors affecting SRAS

Answer 8

Change in cost of raw materials and energy - increases cost of production.
Changes in E.R - weaker pound, dearer imports, and SRAS decreases as production becomes more expensive
Changes in tax rates - Tax increases COP and therefore cause a fall in SRAS

Supply side shocks occurs when there are significant changes in any of these factors

Question 9

Factors affecting LRAS

Answer 9

Technological advances shifts LRAS curve to right as more can be produced. This is because advances will speed up production, so more goods can be produced with the same amount of resources
Changes in relative productivity - if a country is more productive then there will be an increase in LRAS
Changes in education and skills - more skilled workforce = more employable and work quicker so output per worker will increase, which increases LRAS

Question 10

Factors affecting LRAS pt2

Answer 10

Changes in gov regulation - can increase size of workforce, can increase research and development as they can give tax breaks to firms who invest money in research and make it easier to set up businesses.
Demographic changes and migration - increased migration = more workforce = increased LRAS
Competition policy - gov can promote competition between businesses which will force them to improve quality of their goods. Firms have to improve their efficiency to maintain profit, so LRAS will increase