2.3 Aggregate Supply

Question 1

YFE
Meaning?

Answer 1

The maximum level of output an economy can produce using all factors of production at sustainable levels

Question 2

Short-Run Aggregate Supply (SRAS)

Answer 2

Shows the relationship between the price level and real GDP when wages and resource prices are fixed.

Upward sloping because higher prices lead to higher production as firms react to higher profits.

Question 3

Long-Run Aggregate Supply (LRAS)

Answer 3

In the long run, aggregate supply is vertical because wages and prices are flexible, so the economy produces at its full potential regardless of the price level.

Question 4

Equilibrium in AD & AS

Answer 4

SR:AD = SRAS ≠ LRAS
LR:AD = SRAS = LRAS

Wherever AD = LRAS could be long-run equilibrium in the Keynesian Model

Question 5

AD & AS Shifts
Exam Techniques

Answer 5

AD Shifts Up: AD1 🠮 AD2
Growth: ↑
Unemployment: ↓
Inflation: ↑
Trade Position: ↓

AS ( LRAS ) Shifts Right: LRAS1 🠮 LRAS2
Growth: ↑
Unemployment: ↓
Inflation: ↓
Trade Position: ↑

Depends on initial level of economic activity.
AD Only: Size of multiplier & extent of change

Question 6

Factors influencing long-run AS ( LRAS )

Answer 6

A shift of the LRAS to the right means that economies are able to produce more

• Technological advances
• Changes in relative productivity
• Changes in education and skills
• Changes in government regulations
• Demographic changes and migration
• Competition policy

Question 7

Factors influencing short-run AS

Answer 7

The main cause of a shift in SRAS is a change in the cost of production, which these three factors can cause

• Changes in costs of raw materials and energy
• Changes in exchange rates
• Changes in tax rates