Aggregate Supply

Question 1

Define Aggregate Supply

Answer 1

The planned level of output that domestic firms are willing to offer at different average price levels per period of time

Question 2

Define Short run Aggregate Supply

Answer 2

The period during which money wages are fixed and unable to adjust to changes in the average price level

Question 3

Illustrate the SRAS

Answer 3

see notes

Question 4

What are money wages determined by?

Answer 4

Labour contracts meaning that if the price level in the economy changes as long as contracts are in effect money wages will not adjust

Question 5

What accounts for the largest part of the firms’ production costs?

Answer 5

Money Wages

If the apl decreases the real wage increases and in turn firms will be willing to offer less output

Question 6

What is SRAS affected by?

Answer 6

1. Money wages change- change in the minimum wage
2. Energy price change- price of oil
3. Indirect taxes or subsidies

Question 7

Define Long-run aggregate supply

Answer 7

Money wages in the long-run are assumed to be flexible and fully adjusting to changes in the APL. It follows that the real wage is constant. So firms no longer respond to changes in the price level by changing their output

Question 8

Illustrate the LRAS curve

Answer 8

See notes

Question 9

How can LRAS be affected?

Answer 9

1. Quantity of factors of production
2. Quality of factors of production improves
3. Improvements in technology can cause the LRAS curve to shift to the right
4. Efficiency increases
5. Institutional changes

Question 10

What is implied for the AS under the Keynesian School?

Answer 10

No distinction between short and long run

Question 11

Draw the Keynesian AS

Answer 11

see notes

Question 12

Describe what is taking place in different points in the Keynesian AS

Answer 12

Section 1: They higher levels of output can and will be produced without the APL rising. The real output levels corresponding to this region are significantly below the full employment level

Section 2: As the economy approaches its potential output and spare capacity is used up, the price level increases

Section 3: When the economy reaches its full capacity, it is impossible to increase output further bc all factors of production are used up

Question 13

When does a deflationary gap exist?

Answer 13

When equilibrium real output is below the potential level of output

Question 14

When does an inflationary gap take place?

Answer 14

When equilibrium real output is greater than potential output