2.3 AS

Question 1

Define short-run aggregate supply (SRAS)

Answer 1

A curve showing how much output firms would be prepared to supply in the short run at any given price level

Question 2

Define VAT

Answer 2

VAT (value added tax) is an indirect tax on sales revenue paid by businesses

Question 3

Define commodity prices

Answer 3

The price of raw materials and primary products

Question 4

Define costs of production

Answer 4

Raw material, wages, taxes etc. that are included in how much it costs a firm to produce something

Question 5

Define national minimum wage (NMW)

Answer 5

The lowest wage it is possible to pay a worker without breaking the law

Question 6

Define the natural rate of output

Answer 6

The long-run equilibrium level of output to which monetarists believe the macroeconomy will always tend to

Question 7

Define the natural rate of unemployment

Answer 7

The unemployment rate that will exist when the economy is in long-run equilibrium

Question 8

What is the difference between between Monetarists and Keynesian followers?

Answer 8

Monetarists believe the macroeconomy will always adjust to the full employment level of output, Keynesians believe the macroeconomy can settle at an equilibrium below full employment

Question 9

Why is the AS curve upward sloping?

Answer 9

As at higher prices, producers are more willing to supply

Question 10

What causes a movement along the AS curve?

Answer 10

A change in price level

Question 11

Name 3 causes of a shift in the AS curve

Answer 11

Change in resource prices

Business taxes and costs

Supply shocks

Question 12

Define short run and long run

Answer 12

Short run is where at least one factor of production is fixed, long run is where all factors are variable

Question 13

What is the equilibrium?

Answer 13

When AD = AS

Question 14

What happens to the equilibrium if AD increases?

Answer 14

Equilibrium is at a higher GPL and higher level of output, unemployment will fall

Question 15

What does LRAS curve measure?

Answer 15

Productive potential of an economy when all resources are fully and efficiently used

Question 16

Name 6 factors influencing the LRAS curve

Answer 16

Technological advances

Productivity

Education and skills

Government regulations

Demographics and migration

Competition policy

Question 17

What is non-inflationary growth?

Answer 17

When an outward shift in AD can be met without an increase in price level

(as SRAS is highly elastic)

Question 18

What is the relationship between SRAS and LRAS?

Answer 18

In the long run wages rates and other costs can change, along with productivity and technology. LRAS shows the productive potential of the economy and links to PPFs. SRAS holds these long run variables constant.

Question 19

Name 3 factors affecting SRAS

Answer 19

Wage rates
Commodity prices
VAT change

Question 20

Define spare capacity

Answer 20

When the factors of production are not working as hard as they could under normal working conditions and there is unemployment in the economy

Question 21

Explain why the Keynesian AS curve is shaped like it is

Answer 21

• The flat part is where there is spare capacity
• Starts to slope upwards because an increase in output causes the price level to rise as labour is getting scarce and wages are starting to rise
• Vertical at the maximum capacity of the economy as any addition to AD will cause inflation.

Question 22

Explain why the Classical LRAS curve is shaped like it is

Answer 22

Shows maximum capacity of the economy - can only increase if shifted outwards, e.g innovation