2.3 - aggregate supply

Question 1

2.3.1 [characteristics of AS]

what is aggregate supply?

Answer 1

-the total supply of all goods and services available in an economy

Question 2

what is a supply side?

Answer 2

-referring to the ability of producers to produce goods and services and , hence, output [GDP]

Question 3

SRAS?

Answer 3

-total available supply in the short run

Question 4

2.3.2 [short run AS]

what 3 thing influence SRAS?

Answer 4

1- changes in cost of raw materials and energy

2-changes in exchange rates

3- changes in tax rates

Question 5

increase in all 3 factors?

Answer 5

1 - cause left shift in AS

2- £ depreciates so import costs increase = left shift

3 - SRAS shifts left

Question 6

2.3.3 [LRAS]

what direction is LRAS?

Answer 6

-vertical

Question 7

what factors affect LRAS?

Answer 7

-technological advances
-changes in relative productivity
-changes in education and skills
-changes in gov regulation
-demographic changes
-competition policy

Question 8

what is LRAS influenced by?

Answer 8

-by a change in productive capacity of an economy

Question 9

what is productive capacity changed by?

Answer 9

-changes to the quality or quantity of the factors of production

Question 10

classical view of LRAS?

Answer 10

-believe LRAS is perfectly inelastic at a point of full employment of all available resources
-this point corresponds to the maximum possible output on a PPF

Question 11

what do classical economist believe will happen in the long run?

Answer 11

-an economy will always return to the full employment level of output

Question 12

why may there be short run output gaps in the economy?

Answer 12

-during extreme periods of economic growth, an inflationary gap can develop –> in the long run this will self correct and return to the long run level of output, but at a higher average price level

Question 13

Keynesian LRAS view?

Answer 13

-supply is elastic at lower levels of output as there is a lot of spare production capacity in the economy
-supply is perfectly inelastic at full employment of all available resources –> the closer the economy is to this point, the more inflation will occur as firms compete for scarce resources

Question 14

Keynesians; self correcting economy

Answer 14

-believe economy will not self correct
–they believe the gov should increase expenditure to shift AD and change the ‘negative animal spirits’ in the economy

Question 15

Keynisian curve LRAS?

Answer 15

-low output = high unemployment and low confidence
-stops further investment and reduces further consumption