4.10.5 - Determinants of SRAS

Question 1

Explain the rise from AD₁ to AD₂.

Answer 1

The resulting rise in real output is proportionally greater than the rise in the price level because the AD curves shift along the relatively shallow portion of the SRAS curve.

This increase in AD is likely to improve the real national output more than cause inflation as a result.

Question 2

Explain the rise from AD₃ to AD₄.

Answer 2

The resulting rise in real output is proportionaly less than the rise in the price level because the AD curves shift along the relatively steep portion of the SRAS curve.

This increase in AD is likely to be more inflationary than improving the real national output as a result.

Question 3

What happens if the AD curves shift higher than AD₄?

Answer 3

This is the point of full employment at Y_FE. Any increases in AD will be solely inflationary and will not increase the real national output.

Question 4

What causes rightward shifts in the SRAS?

Answer 4

• A fall in business costs of production.
• A fall in unit labour costs.
• A reduction in indirect taxes. (i.e. VAT)
• An increase in government subsidies.
• Technical progress that improves quality and productivity of capital goods.

Question 5

What causes leftward shifts in the SRAS?

Answer 5

• An increase in business costs of production.
• An increase in unit labour costs.
• An increase in indirect taxes. (i.e. VAT)
• A reduction in government subsidies.
• Technical regression that reduces quality and productivity of capital goods.