aggregate supply Flashcards
what does the AS curve show
the total quantity of goods and services that firms in an economy and willing to produce at different price levels
what does the classical LRAS curve look like
verticle at the full-employment level of output, reflects the belief that in the long run, the economy is always at full employment due to the flexibility of prices and wages
the abliltiy of an economy to produce goods and services is limited by the full employment of factor inputs (at sustainable levels)
what is Say’s law
assumes that markets clear and that supply creates its own demand
key insights of the classical view
assumes that markets clear and that supply creates its own demand (say’s law)
long term output is not affected by changes in the price level
suggests that any governemnt intervention is unnecessary and potentially harmful, as the economy self-adjusts to full employment
what is the shape of the keynsian short run + long run AS curve
backwards L shape
horizontal - at low levels of output and employment, the curve is horizontal
upward sloping - as the economy approaches full employment, the curve starts to slope upwards , reflecting increasing pressure on wages and prices
verticle - at full employment, the curve becomes verticle, indicating that output is at its maximum sustainable level, and anyfurther demand increase will only lead to higher prices
what does the classical SRAS curve look like
diagonal normal supply curve
what can cause a fall in SRAS
higher labour costs
fall in the exchange rate
higher commodity prices
increase in taxation
fall in subsidies
what can cause an increase in SRAS
fall in labour costs
rise in the exchange rate
higher commodity prices
fall in taxation
increase in subsidies
how do you show a positive or negative output gap on classical diagram
verticle LRAS
SRAS and AD crossing left to tthe LRAS curve or on the right of the LRAS curve
they believe this will self correct to a macroeconomic equilibrium in the long run, without the need for government intervention
why do classical economists believe that the economy will self correct a positive output gap in the long run
all resources are fully employed, so wages will rise
this will increase the costs of production, causing the SRAS curve to move inwards
why do classical economists believe that the economy will self correct a negative output gap in the long run
as not all resources are being fully employed, wages will fall
this will lower the costs of production, causing the short run aggregate supply curve to move outwards
what are the keynesian views on self-correcting to macroeconomic equilibrium
keynesian economists do not believe that the macroeconomy will self correct from a negative output gap to macroeconomic equilibrium in the long run
they believe that labour and product markets are inflexible, wages will be ‘sticky’ and although they will move upwards in a positive output gap, they will not move downwards in a negative output gap
government intervantion is necessary
