2.3.2 Short-run Aggregate Supply (SRAS)

Question 1

Factors affecting the Short Run Aggregate Supply (SRAS) curve

Answer 1

• Changes in costs of production
• Changes in exchange rates
• Changes in tax rates

Question 2

What does a reduction in the costs of production mean for a SRAS curve?

Answer 2

At the same price level, more output can be produced, so the SRAS curve will shift to the right.

Question 3

Examples of events causing a contraction in AS

Answer 3

Unexpected drop in Labour supply
- Pandemic
- Strikes

Unexpected loss in production capacity
- Power/utility supply
- Natural disasters
- IT/Web issues

Shortage of raw materials
- Components
- Natural resources

Currency fluctuations
- If it becomes too expensive to buy imports, less foreign goods are supplied to your economy.

Question 4

How does a contraction in AS cause inflation?

Answer 4

Price rise.

Question 5

How might an increase in the costs of production lead to a contraction in SRAS?

Answer 5

• As the costs of production increase, fewer goods and services can be produced with the same amount of money.
• So an increase in the costs of production will cause SRAS to decrease, and shift left.

Question 6

How might a depreciation of exchange rates lead to a contraction in SRAS?

Answer 6

• Producers often import raw materials. Depreciation of the exchange rate creates a weaker economy, which makes imports more expensive, and with more expensive imports, the costs of production increase. These higher costs mean less output.
• So a depreciation of the exchange rates will decrease SRAS and shift the SRAS curve left.

Question 7

How might an increase in tax rates lead to a contraction in SRAS?

Answer 7

• Taxes represent an additional cost for firms. Increasing taxes therefore lead to an increase in costs for firms. These higher costs mean less output.
• So a decrease in tax rates will decrease SRAS and shift the SRAS curve left.

Question 8

How might a decrease in costs of production lead to a extension in SRAS?

Answer 8

• As the costs of production decrease, more goods and services can be produced with the same amount of money.
• So a decrease in the costs of production will cause SRAS to increase and shift right.

Question 9

How might an appreciation of exchange rates lead to a extension in SRAS?

Answer 9

• Producers often import raw materials. Appreciation of the exchange rate creates a stronger economy, which makes imports cheaper, and with cheaper imports, the costs of production decreases. These lower costs mean more output.
• So an appreciation of the exchange rates will increase SRAS and shift the SRAS curve right.

Question 10

How might a decrease in tax rates lead to a extension in SRAS?

Answer 10

• Taxes represent an additional cost for firms. Decreasing taxes therefore lead to a decrease in costs for firms. These lower costs mean more output.
• So a decrease in tax rates will increase SRAS and shift the SRAS curve right.

Question 11

SPICED

Answer 11

Strong Pound = Imports Cheap, Exports Dear

Question 12

Shifts in the SRAS curve

Answer 12

The SRAS curve will shift if there is a change in the costs of production.