3.3: UK macroeconomy Flashcards
Aggregate supply
Total quantity of output firms will produce and sell at a given price level in an economy
Shifts in SRAS are caused by:
Business costs - labour and raw materials costs may rise
Exchange rates - may lead to a higher price of imports
Governments can impose taxes which can increase the cost of producing/services
What does the SRAS curve show?
Is upward sloping, shows quantity firms will produce at each price level
Shows how suppliers will react to a higher price level for final outputs of goods and services, holding inputs constant.
What is a movement along the SRAS curve caused by?
Change in average price level
What type of aggregate supply has one factor of production (capital, enterprise, land, labour) fixed?
SRAS
Characteristics of LRAS
All factors of production are fixed
Economy operating at full employment (natural rate of employment)
Supply-side shock
Anything causes SRAS to change i.e. bad harvest, tech improvement, new mineral discovery etc.
What happens if global oil prices rise?
SRAS shift left as imported costs of production rise -> leads to equilibrium level of real GDP falling, and general price level to rise. That is cost-push inflation, causing purchasing power of consumers to fall if wages have not caught up
What is underlying economic growth shown by?
A rightward shift in LRAS. Represents increase in productive capacity of an economy
Long-run factors
Productivity growth - output per unit of workers
Increase in factors of production
Technology
Infrastructure - goods/services transported more easily
Enterprise
Cultural attitudes
Factor mobility - occupational/geographical
Economic incentives - coorporation tax lowered to attract foreign firms or domestic firms invest more
What does the intersection of AD + AS curve show?
Price level and real GDP of the economy
Low price level =
Little incentive to produce, consumers willing to buy
What happens as price level rises?
AS rises, AD falls until equilibrium is reached
Characteristics of classical LRAS
Curve is vertical
In the long run, when all facor’s of production being used, the economy is opperating on its PPF and is at full capacity. Rise in price but can’t incentivise increase in output as economy is maxed out
Can by shifted by an increase in the amount or quality of each factor of production
Characteristics of Keynesian LRAS
LRAS curves upwards
At low quantities of output, there is a lot of spare capacity. Increase in output uses this up and they are not inflationary. Unemployed workers are hired and unused factors of production are used
As output rises, supply becomes a ‘limiting factor’. Could be labour shortages, capital shortages or shortage of raw materials. This is infaltionary but not impossible to increase output
