2.3.1 - Aggregate supply

Question 1

Define aggregate supply

Answer 1

Total planned output of goods and services in an economy at a given time and price level.

Question 2

Define aggregate supply shock

Answer 2

Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce real output and can increase the rate of inflation.

Question 3

Why is the macroeconomic supply curve called the aggregate supply curve and what does it show

Answer 3

It is the sum of all industry supply curves in the economy - shows how much output firms wish to suply at each level of prices

Question 4

Define short run

Answer 4

the period when money wage rates and the price of all other factor inputs in the economy are fixed
- The short run is a time period where at least one factor of production is in fixed supply

Question 5

What assumption is made with the SRAS

Answer 5

tech, production costs and productivity are constant in the short run

Question 6

Why does SRAS slope upwards from left to right

Answer 6

• SRAS = relationship between planned national output (GDP) and the GPL (positive relationship)
• SRAS is upward sloping as higher price for goods and services make output more profitable (firms therefore respond to PROFIT MOTIVE)
• so it enables firms to expand production by hiring extra labour and other resources
• so there is an expansion in supply

Question 7

What is the difference between SRAS when it is price elastic/inelastic

Answer 7

Price inelastic - SRAS slopes steeply upwards
price elastic - SRAS curve would be less steep

Question 8

Movement along the SRAS (expansion/contraction) is caused by

Answer 8

price change

Question 9

What causes a shift in SRAS

Answer 9

o changes in costs of raw materials and energy
o changes in exchange rates
o changes in tax rates

Question 10

What is a supply side shock

Answer 10

• Supply-side shocks are unexpected events affecting costs and prices in different countries.
• An aggregate supply shock is either an inflation shock or a shock to a country’s potential national output (e.g natural disaster or war)

Question 11

How do wage rates affect SRAS

Answer 11

1) increase in wage rates = firms facing increased costs of production
2) Firms will respond by rasing prices
3) So at an given level of output, a rise in wage rates will lead to a rise in GPL
Overall shown by an upwards shifts in SAS

Question 12

How do raw material prices affect SRAS

Answer 12

• general fall in prices of raw materials may occur (possibly world demand fro commodities fall or value of the pound rises so imports are cheaper)
• fall in the price of raw materials lowers industrial costs
• so firms pass on saving to consumer by reducing prices
• shown by a downwards shift in SRAS

Question 13

How does taxation affect SRAS

Answer 13

• increase in the tax burden on industry will increase costs
• SRAS schedule will be pusehd upwards

Question 14

How do exchange rates affect SRAS

Answer 14

• if exchnage rates fall, imports become more expensive
• cost of raw material used in production become more expensive
• firms raise their prices to ensure sufficient profit margin therefore rise in average price level of economy
• Overall shown by upwards shift in SRAS curve

Question 15

what are the types of productivity

Answer 15

• labour productivity is output per worker
• ## capital productivity is outputper unit of capital employed

Question 16

How does productivity improve?

Answer 16

better educated workforce, improved tech - this leads to increase in long run supply
in thr short run it will reduce costs of production so SRAS curve shifts downwards

Question 17

When does a supply side shock occur and how does it affect SR AS

Answer 17

a large change in wage rates, taxation or raw material prices - shifts SRAS upwards