2.3 Aggregate Supply Flashcards
What is aggregate supply?
The volume of goods and services produced within the economy at a given price level.
Explain what happens to a classical LRAS diagram when the economy is in a recession?
In a recession AD falls so firms reduce the workforce to decrease costs and allow them to still operate at yfe however this is not viable in the SR as wages are fixed due to high minimum wages and high unemployment incentives causing a deflationary gap(lower output + higher unemployment) in the LR unemployment further leads to lower levels of output and lower levels of inflation therefore workers wage expectations fall SRAS than increases taking the economy back to yfe itself naturally
Explain what happens to a classical LRAS diagram in a result of an economic boom?
In a boo. AD increases so firms employ new staff so output has increased beyond yfe (inflationary gap) furthermore firms make existing workers work harder through overtime to maximise productive potential. As purchasing power decreases due to inflationary pressure workers can demand higher wages( negative supply side shock) causing a contraction in SRAS causing output to go back from yfe from Y2.
What causes SRAS supply side shock?(Cost of Production)
1)Wages
2)Raw material/commodity prices
3)Oil prices
4)Corporation tax
5)Import Prices
What causes a LRAS supply side shock?(Productive efficiency)
1)Labour productivity
2)Investment (Capital)
3)Quantity of labour (Immigration/Incentives)
4)Competition
5)Infrastructure
How do Classical Economists describe SR?
Where wages(CELL or resource prices) are fixed
How do classical economists describe LR?
Where wages are variable.
What does LRAS represent?
The maximum possible output an economy can produce as determined by its available land, labour, capital and entrepreneurial resources.
How does a rise in the GPL lead to an expansion in SRAS?
If AD increases firms will hire more labour and make resources work harder as they see an opportunity to increase profits.
What is SRAS influenced by?
Changes in the cost of production(Short run refers to the time period where at least one factor of production is fixed).
What is LRAS influenced by?
By a change in the productive capacity of the economy(Productive capacity is changed by changes to the quantity or quality of the factor of production).
How does an increase in costs of raw materials/ energy impact SRAS with an explanation?
As the price of input costs rise, fewer goods/services can be produced with the same amount of money and therefore SRAS decreases(Shifts to the left).
How does a decrease in the cost of raw material/energy impact SRAS with an explanation?
As the price of input costs decrease, more goods/services can be produced with the same amount of money and therefore SRAS increases(Shifts to the left).
How does an appreciation of the exchange rate impact SRAS with an explanation?
Producers often import raw materials, stronger currency=cheaper imports=decrease in COP=more output
How does a depreciation of the exchange rate impact SRAS with an explanation?
Producers often import raw materials, weaker currency=more expensive imports=increase in COP=less output.
How does a decrease in tax rates impact SRAS with an explanation?
Taxes represent additional costs for firms, decreasing taxes=decrease in COP, lower costs=more output
How does an increase in tax rates impact SRAS with an explanation?
Taxes represent additional costs for firms, increasing taxes=increase in COP, higher costs=less output.
How does an increase in labour productivity affect the LRAS curve?
An increase in labour productivity enhances the efficiency of the labour force, allowing more output to be produced with the same amount of labour input. This improvement shifts the LRAS curve to the right, indicating an expansion in the economy’s productive capacity.
How does an increase in investment(capital) affect the LRAS curve?
An increase in investment expands the economy’s capital stock, leading to higher productivity and potential output. This shift enhances the productive capacity of the economy, resulting in a rightward shift of the LRAS curve.
How do changes in the quantity of labour, influenced by immigration and incentives, affect the LRAS curve?
An increase in the labour force enhances the economies productive capacity. This expansion allows for greater output without increasing the intensity of existing resources, resulting in a rightward shift of the LRAS curve, indicating growth in potential output.
How does increased competition affect the LRAS curve?
Increased competition can enhance the productive efficiency for firms, leading to innovations, cost reductions and improved resource allocation. These improvements expand the economy’s productive capacity, resulting in a rightward shift of the LRAS curve, indicating growth in potential output.
How does government spending on infrastructure affect the LRAS curve?
Investments in infrastructure enhance the economy’s productive capacity by improving efficiency and reducing operational costs. This allows increased output without additional input, resulting in a rightward shift of the LRAS curve, signifying growth in potential output.
