7) Aggregate Supply - MMT Flashcards
what is aggregate supply?
the total value of goods and services produced in an economy
what is the relation between aggregate supply and supply curves?
all the individual supply curves for every business/every product added together (aggregated)
Aggregate Supply is the term used to describe the…
National Output
The aggregate supply curve shows…
the amount of goods that can be produced at different price levels
Aggregate Demand and Aggregate Supply behave in the same way in macro as supply does in…
micro
if the price of an individual good or service increases, what opportunity fo firms see?
firms see more opportunity for profit so expand output
as price decrease firms…
reduce output
AS just multiplies these individual actions by a few billion meaning the same type of effect is felt…
nationally as locally, ie a higher price level, higher AS, lower price level lower AS
AS will behave and look differently thsn the micro supply curve when AS is…
long run, short run aggregate supply looks the same
the LRAS of an economy is dictated by the…
capacity of the economy
the capacity of the economy is determined by…
the quantity and quality of the factors of production available within an economy, this is often assumed to be fixed
why is LRAS assumed to be fixed?
countries cannot easily increase the amount of land available to them, labour is also difficult, being determined by factors like birth rate etc
because LRAS is assumed to be fixed, LRAS is independant of changes in…
the Price Level
what does LRAS look like?
it is perfectly inelastic (vertical) line, normally drawn at a point where the factors of production of the country are fully employed , ie operating at full capacity
what does fully employed mean?
operating at full capacity
what is Yfe?
the full employment level of national output, the level of Real GDP (Y) in the economy when all the factors of production are fully utilised.
how can LRAS be demonstrated using a PPF diagram?
at any point on the arc line between full output of consumer and full output of capital goods, the economy’s output is maximised
it is possible to go beyond LRAS in the short term but…
this is not considered sustainable
a change in PL will see us either…
extend or contract along the AS line
A change in the determinants of AS wil…
shift the line
if AS increases it shifts…
right
if AS decreases it shifts…
left
if LRAS is increased then the vertical line shifts…
right
if LRAS is decreased then the vertical line shifts…
left
the main factor that shifts SRAS is…
costs in the economy
when does SRAS shift left?
higher costs (eg high inflation) shifts SRAS left
when does SRAS shift right?
lower costs may shift it right
for LRAS what will the shifts depend on?
the changes in the quantity or quality of the factors of production
what is an example that shifts LRAS to the left or right?
1) immigration, quantity of labour shifts LRAS to the right
2) Mass Emigration, shift LRAS to the left
what are the 6 reasond that LRAS shifts to the right?
1) Increase in Labour Productivity
2) Increase in Investment
3) Increase in Infrastructure
4) Increase in Quantity of Labour
5) Increase in Competition
6) New discoveries
(PIINCQ)
what is investment, LRAS?
when firms spend money on capital goods, wg technology advances
how to increase infrastructure? LRAS
eg transport - new roads/airports
-> reducing long run costs for all businesses in the economy
-> transporting goods and services becomes quicker and cheaper, improving productive efficiency
-> quantity and quality of capital stock improves
how do you increae the quantity of labour? LRAS
(size of the labour force, not unemployment)
eg immigration, incentives -> eg refucing benefits or cutting in income tax
(inactive become active)
how do you increase competition? LRAS
1) through productive efficiency
eg privatisation, deregulation, trade, liberalisation, competition policy
2) reduce costs as much as possible to beat rivals
how to find new resource discoveries? LRAS
through finding land
why would LRAS shift to the left?
1) decrease in Labour Productivity
2) Decrease in Mass Capital Depreciation
3) War, Conflict, Natural Disaster that destroys infrastructure
4) Deaths, health crisis, hysteresis (long term unemployment, dropout), immigrants leaving
