Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

The total output of goods and services that producers in an economy are willing and able to supply at a given price level over a given period of time

Question 2

Why is it called the aggregate supply curve?

Answer 2

It is called the AS curve because it is the sum of all the smaller industry supply curves in the economy

Question 3

What does the AS curve shows?

Answer 3

It shows how much output firms wish to supply at a given price level

Question 4

What does the AS curve assume?

Answer 4

The prices of factor inputs remain unchanged
If costs of production change the curve will shift

Question 5

Is the AS curve elastic?

Answer 5

Yes

Question 6

What is short run aggregate supply?

Answer 6

A period in which at least one factor of production is fixed

Question 7

What does the SRAS curve assume in the shirt run?

Answer 7

It assumes that money wage rates stay constant and are fixed

Question 8

What can a movement along the SRAS curve lead to?

Answer 8

A change in the price level and output

Question 9

What can cause a shift in the SRAS curve?

Answer 9

Wage rates
Raw material prices
Taxation
Exchange rates
Productivity

Question 10

What effect does wage rate have on the SRAS curve?

Answer 10

An increase in wage rates will result in firms facing increased costs of production. It will lead to a rise in the average price level. Shift upwards of the curve

Question 11

What effect does raw material price have on the SRAS curve?

Answer 11

A fall in the price of raw materials will lower industrial costs and will lead to some firms reducing the prices of their products. This will be a shift of the curve downwards.

Question 12

What effect does taxation have on the SRAS curve?

Answer 12

An increase in the tax will increase costs. The supply curve will shift upwards

Question 13

What effect does exchange rate have on the SRAS curve?

Answer 13

If the exchange rate falls, the price of imported goods is likely to rise. This will lead to an increase in prices throughout the economy . (WPIDEC). The supply curve will shift upwards.
If the exchange rate rises, the price of imported goods is likely to fall. This will lead to a decrease in prices throughout the ceremony. (SPICED). The supply curve will shift downwards

Question 14

What effect does productivity have on the SRAS curve?

Answer 14

Increase in productivity overtime will lead to an increase in long run aggregate supply. However, it will also reduce costs of production in the short run
This shifts the supply curve downwards

Question 15

What is a supply side shock?

Answer 15

When there is a large change in wage rates, material prices or taxation. This will have a large and sudden effect on aggregate supply

Question 16

What is LRAS?

Answer 16

Shows the productive potential of an economy. A period in which all factors of production are variable and technological change is possible. It’s a straight line

Question 17

What does LRAS show?

Answer 17

How much real output can be produced with a given level of resources and technology

Question 18

Why is the LRAS curve vertical?

Answer 18

It can be argued that in the long run, aggregate supply is fixed at a given level of real output, whatever the price level

Question 19

What is the LRAS curve?

Answer 19

Represents the potential output that an economy can produce

Question 20

Trend rate of growth?

Answer 20

Check notion

Question 21

What is said to exist when output is above or below the long term trend?

Answer 21

When output is above or below this long term trend level, an output gap is said to exist

Question 22

What is a positive output gap?

Answer 22

This is when there is too much demand in the economy. Therefore they are overworking their factory resources. Actual GDP is more than potential GDP

Question 23

What is a negative output gap?

Answer 23

The economy is not fully using its factor resources due to a large decline in aggregate demand in the economy
Actual GDP is less than the potential GDP

Question 24

Why does the LRAS shift over time?

Answer 24

This is because the quality and quantity of the factors of production change over time, as does the way in which they are combined. These bring about a change in the productive potential of the economy

Question 25

What are the factors affecting LRAS?

Answer 25

Technological advances
Changes in relative productivity to competing economies
Changes in education and skills
Changes in government regulations
Demographic changes and migration
Competetition policy
Enterprise and risk taking
Factor mobility
Economic incentives

Question 26

How do technological advances shift the LRAS curve

Answer 26

Improvements in technology allow new products to be made or existing products to be produced with fewer resources
Increases in capital productivity shift the LRAS curve to the right.

Question 27

How do changes in relative productivity to competing economies shift the LRAS curve?

Answer 27

• An increase in UK productivity of a good relative to other world economies will encourage production of that good in the UK
• Firms will therefore invest and the LRAS curve will shift to the right

Question 28

How do changes in education and skills shift the LRAS curve?

Answer 28

• Improvements in education and skills of workers will raise their productivity
• This increases long-run aggregate supply and the LRAS curve shifts to the right

Question 29

How do changes in government regulations shift the LRAS curve?

Answer 29

• They can lead to an increase in LRAS, shift LRAS curve to the right
• For example, making it simpler to set up a company could encourage more entrepreneurs to create companies, output and jobs

Question 30

How do demographic changes and migration shift the LRAS curve?

Answer 30

• Population changes that increase the size of the workforce are likely to increase LRAS and shift the curve right
• An ageing population where the number of people of working age is shrinking will reduce LRAS and shift the curve left

Question 31

How does competition policy shift the LRAS curve?

Answer 31

• Government policies which increase competition amongst firms is likely to increase LRAS and shift the curve right
• Competition is likely to force firms to be more productive and reduce their costs or make them be more innovative by producing new products and new ways of producing goods and services
• However, less competition can sometimes be beneficial if it encourages investment and innovation

Question 32

How does enterprise and risk taking shift the LRAS curve?

Answer 32

Economies where enterprise and risk taking are encouraged are likely to see increases in their LRAS and shift the curve right

Question 33

How does factor mobility shift the LRAS curve?

Answer 33

• Increases in factor mobility, such as workers coming in, are likely to increase LRAS and shift the curve to the right
• Workers coming into the UK is likely to increase the PPF

Question 34

How do economic incentives shift the LRAS curve?

Answer 34

• Improvements in economic incentives can increase LRAS and shift the curve to the right
• For example, giving tax incentives for the unemployed to take a job can reduce unemployment and increase output.

Question 35

What is the vertical LRAS curve called?

Answer 35

Classical LRAS curve

It is based on the classical view that markets tend to correct themselves fairly quickly when they are pushed into disequilibrium by some shock

Question 36

What happens if all markets are in equilibrium?

Answer 36

There can be no unemployed resources. Hence, the economy must be operating at full capacity on the PPF boundary

Question 37

What does the Keynesian curve look like?

Answer 37

Check notiom

Question 38

What did Keynesian economists point out

Answer 38

There have been times when the markets have failed to clear for long periods of time