Aggregate Supply

Question 1

What is aggregate supply?

Answer 1

Aggregate Supply- total planned output of 🚘/🧹 in a country

Question 2

Why does the short run AS curve shift and what is the difference between a long run AS curve shifting?

Answer 2

Short run AS shifts due to changes in productions costs BUT overall productive capacity same (at least 1 fixed factor of production)

Question 3

What are short run shifts known as?

Answer 3

External shocks

Question 4

What are 3 examples of short run shifts (external shocks)?

Answer 4

1) Changes in costs of raw materials & energy
2) Changes in exchange rate
3) Changes in tax rates

Question 5

Why do long run AS curves shift?

Answer 5

Long run AS shifts due to changes in productive potential (all factors of production variable)

Question 6

What is the classical view of the LRAS curve?

Answer 6

• Classical view- LRAS inelastic- economy operates at full capacity in long run & …✖️ unemployed resources/spare capacity
• Long-term increase in AD (faster than growth in LRAS) just causes inflation & ✖️ increase in real GDP

Question 7

What is the Keynesian view of the LRAS curve?

Answer 7

Keynesian view- equilibrium output level can occur below full employment level- curve elasticity changes- BUT as AD ⬆️ LRAS curve becomes ⬆️ inelastic & … price ⬆️ & output ⬆️ by less as economy approaching full capacity

Question 8

Describe and explain the 3 parts of the Keynesian LRAS curve

Answer 8

1) A = spare capacity- when curve elastic (AD ⬇️)- factors of production available to ⬆️ output without ⬆️ in price- 🇯🇵 FOR PAST 2 DECADES
2) B = bottlenecks (restrictions in capacity to ⬆️ production occur- prices begin to ⬆️ with less ⬆️ in output)- approaching full capacity e.g. shortages of workers- in order to attract workers wages ⬆️ … ⬆️ price to achieve higher ⬆️ output - HS2 🚅 CONSTRUCTION WORKERS EXAMPLE
3) C = full capacity/employment- LRAS curve completely inelastic- ⬆️ in output ✖️ possible- inflation only- e.g. all workers have work … ⬆️ wages only gets workers from other jobs
PART C ONLY FOR CLASSICAL ECONOMISTS

Question 9

What factors in the labour market cause a shift in the LRAS curve?

Answer 9

1) Changes in productivity (output per unit of input)- if ⬆️ relative to country’s trading partners then productivity gap closing & … ➡️ shift
2) Changes to education & skills 📚- ⬆️ spending on education & training = ⬆️ output per worker
3) Demographic changes & migration- birth rate, life expectancy- may change demographic of population (old & young)- migration may lead to ⬆️ employment or ⬆️ unemployment- effects wages potentially & labour force available
4) Health 🏥 spending- ⬆️ health spending = workers ⬇️ days off work & work longer (past retirement potentially)
BUT spending may be absorbed by ⬆️ wages for health staff … level of health care ✖️ improved
ALSO most healthcare spending goes on elderly or young (neither economically active)

Question 10

What factors in the product market cause a shift in the LRAS curve?

Answer 10

1) Technology- investment & innovation in technology-> ➡️ shift as long term costs ⬇️ for firms
2) Competition & barriers to trade- globalisation-> ⬆️ AS as firms compete for market & consumer demand