Aggregate Supply

Question 1

Factors that affect SRAS?

Answer 1

The price of raw materials

The exchange rate - a devaluation in the currency will increase the cost of many raw materials such as oil and shift SRAS to the left.

Taxes and subsidies - A rise in VAT or excise duty will increase the costs of goods and services and shift SRAS to the left.

Money wages - A rise in wages will increase the cost of firms and shift SRAS to the left.

Question 2

What is LRAS?

Answer 2

In the long run, AS is determined by the quantity of factors of production and the productivity of labour / capital.

Question 3

Factors affecting LRAS?

Answer 3

Population - A rise in the number of working age people will increase the labour force and increase productive capacity. The working age population can be affected by birth rares and net migration.

• Technology
• Infrastructure
• Investment
• Financial System
• Education and skills

Question 4

What is the classical view of LRAS?

Answer 4

The classical view of LRAS is inelastic. A rise in AD will cause inflation in the long run. Economic growth requires LRAS to shift to the right.

Question 5

What is the Keynsian view of LRAS?

Answer 5

The Keynsian view is that there can be spare capacity in the long run. Thus, an increase in AD can cause higher real GDP.