Aggregate Supply

Question 1

Short-Run Aggregate Supply Definition

Answer 1

The amount that will be supplied for the period of time in which at least one factor of production is fixed.

Question 2

Long-Run Aggregate Supply Definition

Answer 2

The amount that will be supplied for the period of time when all factors of production are variable, equivalent to the productive potential of the economy.

Question 3

Factors causing a Shift in SRAS

Answer 3

1. Changes to Costs of Production
   - Wages
   - Raw Materials
   - Labour Productivity
   - Interest Rates
2. Changes to taxation rates that affects firms, subsidies and imported costs.
   - e.g. Corporation tax, VAT, Business rates
   - Costs of imported components
   - Scale of subsidies to industries
3. Supply shocks.
4. Tariffs and Quotas.
5. Price of commodities.

Question 4

Classical LRAS Curve Theory

Answer 4

• An economy will always produce the maximum that its factor resources will allow.
• Markets always function efficiently over the long run.

Question 5

Keynesian LRAS Curve Theory

Answer 5

• An economy could be in equilibrium below full employment. Based of research about the Great Depression.
• Markets can take time to clear and you can get long periods of unemployment.
• Markets are sticky downwards (labour markets don’t clear).
• Negative multiplier effect.
• Paradox of thrift, when people lose confidence, they save more, causing a further fall in demand.

Question 6

Elasticity of Aggregate Supply

Answer 6

• When spare capacity is high, AS will be elastic, as firms can meet a rise in output without inflation.
• The elasticity of the AS curve falls as output increases due to:
  1. Spare Capacity declining.
  2. Diminishing returns in production.
  3. Resource shortages as the economy approaches full employment.

Question 7

Classical and Keynesian LRAS Differences

Answer 7

Fiscal Policy:
K - In recession, expansionary fiscal policy can stimulate economic activity.
C - Fiscal poicy causes in long-term increase inreal output.
Wage Rigidity:
K - Wages can be sticky downwards causing unemployment.
C - In absence of min wages/ trade unions wages are flexible.
Unemployment:
K - Demand-deficient unemployment big causes.
C - Tend to emphasis supply-side unemployment.
Phillips Curve:
K - There is a tradde off between unemployment and inflation.
C - Only a trade-off in the short-term.
Government Borrowing:
K - In recession, governments should borrow more to offset fall in private spending.
C - Government should seek to run a balanced budget.
Crowding Out:
K - No crowding out in a recession.
C - Government borrowing causes more crowding out.