3.2 Equilibrium Level of National Income - Effects of a Change in AS Flashcards
How would you fully explain how a change in AS (due to a fall in COP and hence a downward shift in the SRAS) leads to a change in RNY/GPL?
(Assume initial equilibrium level of economy), increase in AS ==> domestic production of goods increase ==> all demand is met (no shortages), not all output produced is consumed by the 4 sectors of the economy (leading to surpluses). Unplanned accumulation of inventories causes actual stock levels to rise above optimum levels ==> firms decrease production in the next time period to return stocks to the optimum levels ==> employ less FOPs ==> pay out less factor income to households ==> NY (sum of all households’ income) falls OR decrease in the COP ==> GPL falls.
How would you fully explain how a change in AS (due to a rise in the productive capacity and hence a downwad shift of the SRAS and a rightward shift of the LRAS) leads to a change in RNY/GPL?
(Assume initial equilibrium level of economy), rise in productive capacity ==> increase in full employment level from Yf1 to Yf2 ==> (potential economic growth) alleviates supply bottlenecks ==> firms do not have to bid for FOPs ==> COP falls ==> GPL falls. AND rise in productive capacity ==> firms employ larger quantity of FOPs/higher quality of FOPs/better level of technology ==> more labour required ==> firms pay out more factor income to households ==> NY (sum of all households’ income) rises.
increase in AS ==> domestic production of goods increase ==> all demand is met (no shortages), not all output produced is consumed by the 4 sectors of the economy (leading to surpluses). Unplanned accumulation of inventories causes actual stock levels to rise above optimum levels ==> firms decrease production in the next time period to return stocks to the optimum levels ==> employ less FOPs ==> pay out less factor income to households ==> NY (sum of all households’ income) falls OR decrease in the COP ==> GPL falls.
