2.3 Aggregate Suppply Flashcards
Define aggregate supply
Total quantity of G+S supplied by firms within an economy over a period of time
Define SRAS
The relationship between planned national output (GDP) and the general price level.
Factors influencing SRAS (GREETS)
Govt spending
Raw materials
Exchange rates
Employment costs
Taxation
Subsidies
Why is SRAS upward sloping
There is a positive correlation bwtween PL and AS. In the short run, wages are fixed.
When the PL increases, firms, as profit maximisers, are incentivised to expand output, because they can charge higher prices with fixed wage costs (only pay for overtime).
Define LRAS
Show the maximum possible output when all factor of production are employed
What is the classical view on LRAS
Markets tend to correct themselves quickly. If a market is in disequilibrium at a point in time, markets will naturally move back towards equilibrium where there is no spare capacity and the economy is producing at its full productive potential.
What is Keynsian view on LRAS
There is an equilibrium below full employment. At horizontal point, firms do not have to offer high wages to offer employment. Before the vertical line, labour is becoming more scarce and so firms offer higher wages. At top of vertical line, firms are at full employment and output becomes price inelastic.
Define productivity
Output per unit of input
Why would a reduction in LRAS lead to cost push inflation
Due to greater competition for resources as shortages are created in the economy with the resulting cost push inflation.
Why would a reduction in LRAS decrease real GDP
Due to reduction in the total quantity of G+S supplied by firms within the economy.
The lower equilibrium level of output (Y2) will require fewer workers to produce the fewer goods and services and so unemployment will increase.
Why might a reduction in LRAS which has led to cost push inflation cause a current account deficit
The cost-push inflation that has been created will cause exports to become less price competitive relative to foreign domestic goods, and cause imports to be more price competitive relative to domestically produced goods. This will affect the government’s balance of payments objective of equilibrium as the current account moves into deficit over the longer period.
if there is a reduction in LRAS due to a fall in the size of the labour force, for example, arising from an increase in the number of 18 year olds attending university. Why might this increase LRAS?
LRAS may increase.
This is because these highly skilled graduates will, in due course, add cumulatively to the productive capacity of the economy, increasing the LRAS in the fullness of time.
