34) Aggregate supply

Question 1

What is the SRAS curve?

Answer 1

SRAS curve is upward sloping as higher prices for goods make them more profitable and enable businesses to expand production by paying overtime wages.

Question 2

What is the LRAS curve?

Answer 2

In the LR there is a limit to how much a firm can supply (capacity constraints such as labour or machinery) This means the curve becomes vertical at full capacity

Question 3

What potentially causes the LRAS to shift?

Answer 3

An outward shift of LRAS shows a rise in productive potential. Supply-side policies such as:
- Technological advances
- Increases in productivity
- Improvement in education/skills
- More active workers
- Greater competition
- Greater enterprise and risk taking
- Greater factor mobility
- Economic incentives
Supply side shocks:
- Energy
- Raw materials
- Commodities
- Tariffs
- Foodstuffs

Question 4

What causes the SRAS to shift?

Answer 4

• Wages
• Labour productivity
• Energy costs
• Exchange rate
• VAT
• Change in government subsidies
• Supply shocks (e.g. hurricane, tsunami, drought, war)