Aggregate supply 2.3.3 unit 27

Question 1

How would an increase in wage rates effect shifts in short run aggregate supply?

Answer 1

As a result of higher wages costs for firms will increase. Some firms will react by increasing prices thus resulting in real price level rising as SRAS shifts upwards.

Question 2

How would a fall in raw materials effect shifts in short run aggregate supply?

Answer 2

If there was a general fall in prices will result in a fall of costs for firms meaning they decrease there price to match other falling prices across the world meaning SRAS will shift downwards.

Question 3

How would exchange rates falling effect shifts in short run aggregate supply?

Answer 3

If the exchange rates where to fall the cost of imported goods are likely to increase in prices for firms so firms will react by increasing prices thus resulting in real price level rising as SRAS shifts upwards.

Question 4

What factors can shift SRAS?

Answer 4

• wage rates.
• Raw material costs.
• Taxation.
• Exchange rates.
• Productivity

Question 5

What effects can shift LRAS?

Answer 5

• Technological advancements.
• Changes in relative productivity to competing economies.
• Changes in education and skills.
• Changes in government regulations.
• Demographic changes and migration.
• Competition policy.
• Enterprise and risk taking.
• Factor mobility.
• Economic incentives.
• The institutional structure of the economy.

Question 6

How will changes in the institutional structure of the economy shift LRAS?

Answer 6

The institutional structure if an economy refers to the political system, laws, the education system, the banking system, the framework of morality and behaviour and other systems which determine how an economy works. Positive changes away from corruption and inefficiencies which shift LRAS to the right and visa versa.