3.2.3 Short run of Aggregated supply

Question 1

What is short-run aggregate supply

Answer 1

Short-run aggregate supply is the relationship between planned national output and the general price level.

A rise in the GPL should stimulate an expansion of aggregate supply as businesses respond to the profit motive.

Question 2

Why is the short-run AS diagram upward sloping

Answer 2

higher prices for goods and services make output more profitable and enable an expansion in production by hiring extra labour and other resources.

Question 3

A rise in the price level does what to short-run AS

Answer 3

causes an expansion of AS

Question 4

A fall in general price level does what to short-run AS

Answer 4

causes a contraction of aggregate supply

Question 5

When a business is not operating at full capacity, it is doing what

Answer 5

not making full use of its available capacity

there are spare factors of production (capital, land, labour)

Question 6

when an economy has plenty of spare capacity, how does this affect short-run AS

Answer 6

short-run aggregate supply is elastic

Question 7

If production costs rise, then short-run aggregate supply increases.

Reasons for changing costs include

Answer 7

1) Changes in resource (input) prices

wage costs, labour productivity, raw materials, energy costs

2) Business taxes, subsidies, regulations, and imported costs

VAT + environmental charges/employment taxes, changes in size/scale of Gov subsidies, business rates, and cost of meeting other laws

3) Cost of imported components (effect by exchange rates and commodities prices)
4) Unexpected Supply Shocks affecting price of raw materials (e.g. hurricane, tsunami)

Question 8

If wages rise in line with productivity, what will happen to unit labour costs and hence SRAS

Answer 8

unit labour costs will not change, and hence SRAS will not change

Question 9

How would a contraction in short-run aggregate supply be shown on a graph, for example from a rise in raw materials, energy costs, etc

Answer 9

an inward shift

Question 10

How would an expansion in short-run aggregate supply be shown in a diagram, for example, due to reduced taxes or exchange rate strengthening

Answer 10

outward shift

Question 11

What could be external factors, that would affect SRAS

Answer 11

• Would oil and gas prices
• energy prices
• Other minerals/metal prices
• Food produce prices
• Import tariffs/quotas