2.3.2 - Short run aggregate supply

Question 1

What does short-run mean?

Answer 1

In the short-run it is assumed that all factors of

production are fixed.

Question 2

What is the AS curve definition?

Answer 2

Aggregate supply curve shows the relationship

between the average level of prices in an economy and the total level of output.

Question 3

Name 3 factors which affect SRAS

Answer 3

• Changes in exchange rates
• Changes in tax rates
• Changes in costs of raw materials and energy

Question 4

Explain how changes in costs of raw materials and energy

Answer 4

Higher raw material prices e.g. oil and metals increase
the firm’s costs of production and will reduce SRAS. This will lead to a shift in the supply curve to the left. This impacts on both price and quantity supplied as a
reduction in firms’ output means an increase in price.

Question 5

Explain how changes in exchange rates affect SRAS

Answer 5

If the currency strengthens, this makes purchasing those raw materials relatively cheaper. This will lead to an increase in supply with the SRAS curve shifting to the right. However, there is a negative effect as exports become more expensive, reducing demand. This may lead to UK firms cancelling capital projects, leading to decreased supply in the longer term/

Question 6

Explain how the change in tax rates can affect

Answer 6

An increase in business tax rates e.g. Corporation Tax will increase costs of production. This will mean that SRAS will decrease and their will be a shift to the left of the SRAS curve. Larger firms such as multinational corporations might look to avoid paying tax by relocating production facilities to lower cost sites in low tax countries.