2.3 Aggregate Supply LS4

Question 1

Why is macroeconomic supply curve called aggreggate supply curve?

Answer 1

Because it is the sum of all the industry supply curves in the economy

Question 2

Why is SRAS upward sloping?

Answer 2

• Is the combined curve for all industry supply curves in the economy which are all upward sloping
• Assumes that firms wish to increase their level of output and production costs increase as output increases so prices increase

Question 3

Why is SRAS price elastic?

Answer 3

• Firms can increase output in the short term by getting workers to do overtime

Question 4

What does SRAS assume?

What is the short run period defined as?

Answer 4

That money wage rates and the prices of all factor inputs in the economy are fixed, and that firms wish to increase their level of output

Question 5

What causes movements along the SRAS curve?

Answer 5

• Changes in real output
• Changes in price levels

Question 6

What causes a shift in SRAS?

Answer 6

• Wages
• Raw material costs (exchange rates)
• Taxation/Subsidies
• Productivity

Changes in costs of production

Question 7

What is meant by a supply-side shock?

Answer 7

When there is a large change in the costs of production

E.g. war caused huge increase in the price of oil

Question 8

Describe LRAS

Answer 8

• Has capacity constraints (limit to how much firms can increase their supply)
• AS curve vertical at a fixed given level no matter what the price level is
• No underutilised resources

Question 9

What does LRAS show?

Answer 9

The productive potential of an economy

Kinda like a PPF x

Question 10

What causes a shift in LRAS?

Answer 10

• Technological advances
• Changes in relative productivity
• Changes in education/skills
• Changes in gov. regulations
• Migration/demographic changes
• Competition policy (policies that increase competition amongst firms)
• Enterprise and risk taking
• Factor mobility
• Economic incentives

Anything that changes the quality and quantity of factors of production

Question 11

What do Keynesian economists believe about the LRAS curve?

Answer 11

That an economy can operate below full capacity

(More realistic model)

Question 12

What do Keynesian and classical economists agree on?

Answer 12

• That AD is downwards sloping and SRAS is upwards sloping
• LRAS is vertical at full capacity

Question 13

In the short run, what effect does a rise in AD have on equilibrium output?

Answer 13

Increases

Question 14

Why might wages be ‘sticky downwards’ in a modern economy?

Answer 14

• National minimum wage
• Low wages can demotivate workers and lead to lower productivity