2.3.1 - The characteristics of aggregate supply

Question 1

What are the 4 factors of production?

Answer 1

Land
Labour
Capital
Enterprise

Question 2

Draw/describe an AD curve

Answer 2

• Y axis labelled as “Price Level”
• X axis labelled as “Real GDP”
• P1 and Y1 labelled where AD meets their axis
• The AD line sloped downwards like demand on a S&D curve

Question 3

What is ceteris paribus?

Answer 3

All other factors being held constant.

Question 4

What is the relationship between the price level and aggregate demand?

Answer 4

In the most general sense (and assuming ceteris paribus conditions), an increase in aggregate demand corresponds with an increase in the price level; conversely, a decrease in aggregate demand corresponds with a lower price level.

Question 5

What causes shifts in aggregate demand?

Answer 5

A change in value of consumer spending, investment spending, government spending, exports, and imports.

Question 6

Define AS Curve

Answer 6

Aggregate supply curve shows the relationship between the average level of prices in an economy and the total level of output.

Question 7

Draw/describe an AS curve

Answer 7

• X axis labelled as “Real National Output”
• Y axis labelled as “Price Level”
• P1 and Y1 labelled where SRAS meets their axis
• The SRAS line sloped upwards like supply on a S&D curve

Question 8

What is meant by short-run?

Answer 8

In the short-run it is assumed that all factors of production are fixed.

Question 9

What is meant by long-run?

Answer 9

In the short-run it is assumed that all factors of production are variable and can be increased over time. In effect, long-run aggregate supply represents the maximum possible output an economy can produce
as determined by its available land, labor, capital
and entrepreneurial resources.

Question 10

What happens when there is a movement along the SRAS curve?

Answer 10

A rise in the price level leads to an expansion
in short-run aggregate supply.

A fall in the price level leads to a contraction in short-run aggregate supply.

Changes in aggregate demand lead to movements along the SRAS curve e.g. if AD increases, firms will hire more labor and
make resources work harder in order to boost supply as they see an opportunity to increase profits.

Question 11

What happens when there is a shift of the SRAS curve?

Answer 11

An increase in costs of production will lead
to a shift from SRAS to SRAS2.

A decrease in costs of
production will lead to a shift
from SRAS to SRAS1.