2.3.2 Short-run Aggregate Supply (SRAS) Flashcards

1
Q

Factors affecting the Short Run Aggregate Supply (SRAS) curve

A
  • Changes in costs of production
  • Changes in exchange rates
  • Changes in tax rates
  • Supply side shocks
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2
Q

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

A

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

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3
Q

Examples of events causing a contraction in AS

A

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.

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4
Q

How does a contraction in AS cause inflation?

A

Price rise.

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5
Q

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

A
  • 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.
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6
Q

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

A
  • 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.
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7
Q

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

A
  • 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.
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8
Q

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

A
  • 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.
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9
Q

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

A
  • 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.
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10
Q

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

A
  • 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.
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11
Q

SPICED

A

Strong Pound = Imports Cheap, Exports Dear

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12
Q

Shifts in the SRAS curve

A

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

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