Aggregate Supply

Question 1

aggregate supply

Answer 1

total output produced by an economy at a given price level

Question 2

how long is the short run

Answer 2

less than 6 months

Question 3

how long is the long run

Answer 3

over a year to several years

Question 4

why is the classical LRAS curve a straight line

Answer 4

In the long run economy will reach maximum capacity level of output all resources are fully utilised

Question 5

how do changes in costs of raw material affect aggregate supply in the short run

Answer 5

reduction in costs of production means more can be produced at the same price level

Question 6

how can external shocks affect AS in the short run

Answer 6

natural disaster or war can cause sudden scarcity of resources which reduces AS

Question 7

how do changes in tax affect AS in the short run

Answer 7

reduction in corporation tax will increase productive capacity of firms and a reduction in income tax gives more incentive to work

Question 8

how do changes to the exchange rate affect AS in the short run

Answer 8

strong pound makes imports cheaper so raw materials become cheaper and cost of production becomes cheaper so AS increases

Question 9

why is the Keynesian LRAS curve flat to begin with

Answer 9

it is horizontal as AS is elastic because there is spare capacity in economy, output can be increased without an increase In price.

Question 10

why does the Keynesian LRAS curve slope upwards

Answer 10

in the long run it will cost firms more to increase output as there is less spare capacity so price will increase swell until economy reaches full capacity and only price can be reached.

Question 11

what is the natural employment level in the uk

Answer 11

4.5%

Question 12

what does CELL stand for

Answer 12

capital
entrepreneurship
land
labour

Question 13

what are the 3 causes of aggregate supply to shift

Answer 13

• changes in quantity of cell
• changes in quality of cell
• changes to productive efficiency

Question 14

how do technological advancements influence LRAS

Answer 14

help production to be more efficient which increases maximum output and increases AS

Question 15

how do changes in education influence LRAS

Answer 15

improvements in education help create a more skilled workforce which increases output per person so increases AS

Question 16

how does migration influence LRAS

Answer 16

increases capacity of economy and AS by having increased supply and skill of labour

Question 17

how do changes in government regulation influence LRAS

Answer 17

removal of red tape helps production to be more efficient so AS increases

Question 18

how does competition policy influence LRAS

Answer 18

Government policy that promotes competition between business which drives them to produce higher quality goods or more efficiently which increases AS

Question 19

how do improvements in healthcare affect LRAS

Answer 19

Workers will have less time off and be able to work into older age so the size and productivity of the workforce will increase which increases AS

Question 20

where is macroeconomic equilibrium

Answer 20

where AD and AS cross

Question 21

why do keynsian economists argue against increasing AS in a depression

Answer 21

there is already so much spare capacity in the economy so increasing AS will not change the equilibrium, there will be no increase to output

Question 22

what do classical economists argue is needed to increase all main four economic policies indicators at the same time

Answer 22

Increase in LRAS as it results in an increase in output

Question 23

How does an increase in AD affect output in the classical short run

Answer 23

increases output which increased derived demand for labour so unemployment reduces

Question 24

How does an increase in AD affect output in the classical long run

Answer 24

output doesn’t increase as the economy is already at full capacity

Question 25

what does it mean when AS is elastic

Answer 25

more spare capacity in the economy

Question 26

what does it mean when AS is inelastic

Answer 26

less spare capacity in the economy so AD increases are more inflationary