Aggregate Supply

Question 1

What is aggregate supply

Answer 1

It is defined as the total amount of goods and services produced and supplied by an economy’s firms over a period of time

Question 2

SRAS are caused factored by cost of production

What changes cost of production

Answer 2

1. Wage rates
2. Cost of raw materials
3. Change in cost of imports
   (some country import their raw materials)
4. Change in government indirect taxes and subsidies

Question 3

There are 2 different school of thoughts on the shape of Long Run Aggregate Supply

Answer 3

1. Monetarist
2. Keynesian

The different shaped LRAS curves lie at the basis of controversies about different policies to be used by the government

Question 4

Classical LRAS

Answer 4

Economist believes the efficiency of market forces and their view that there should be the very minimum government intervention in the allocation of resource in the economy

Market tends to correct themselves fairly quickly

There can be no unemployed resources as the economy is operating on its PPC

Question 5

Keynesian LRAS

Answer 5

Keynesian economist argue that in the long run, unemployment at persist because wages don’t necessarily fall when unemployment occurs

1. Region 1
   - AS is perfectly elastic as economy is in a deep and prolonged depression
   - producer can raise output level without increasing the APL as there are spare capacity (unemployment)
2. Region 2
   - economy approaches PPC as spare capacity are used up.
   - to increase output, FOP are greater, causing APL to rise.

Region 3
- Economy reaches its full capacity, All FOP are employed
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