2.3 Aggregate Supply

Question 1

why is the AS curve upward sloping

Answer 1

combination of all individual supply curves that are upwards sloping
as real output increases, firms have to spend more to increase production (law of increasing costs)

Question 2

what causes a move along the AS curve

Answer 2

change in average price level in an economy

Question 3

what is short run aggregate supply (SRAS)

Answer 3

change in costs of production or productivity, where at least one factor is fixed

Question 4

what is long run aggregate supply (LRAS)

Answer 4

change in productive capacity of an economy (changes in quality/quantity of FOPs)

Question 5

what affects SRAS

Answer 5

costs of raw materials/energy
the exchange rate
tax rates

Question 6

what affects productive capacity in an economy

Answer 6

the quantity or quality of the factors of production

Question 7

what is the classical view of LRAS

Answer 7

LRAS is perfectly inelastic at a point of full employment of all available resources. in the long run an economy will always return to its full level of output

Question 8

what do classical economists believe happens in extreme periods of economic growth

Answer 8

an inflationary gap develops, but in the long run this self corrects to a higher average price level

Question 9

what is the Keynesian view of LRAS

Answer 9

supply is elastic at lower output levels since there is lots of spare productive capacity in an economy, but perfectly inelastic at a point of full employment (YFE)

Question 10

what do Keynesian economists believe about YFE

Answer 10

an economy will not always self correct and return to YFE - it can get stuck at an equilibrium below YFE, so governments must intervene to shift AD to the right

Question 11

what factors influence LRAS

Answer 11

technological advances
changes in relative productivity
changes in education/skills
changes in government regulations
demographic changes
competition policy