Aggregate Supply

Question 1

Aggregate Supply def.

Answer 1

Total value of the goods and services produced in an economy in a given time

Question 2

SRAS

Answer 2

When factor prices (wages, rents, interest) are fixed

Often taken to be less than a year as these prices are usually negotiated annualy

Question 3

SRAS Curve (u)

Answer 3

U

Question 4

Shifts in SRAS

5

Answer 4

Wage rates
Raw material prices
Exchange rates
Productivity
Taxes

Question 5

LRAS

Answer 5

Over time, the LRAS should shift to the right as the economy grows, thus output is growing

Question 6

Shifts in LRAS

4

Answer 6

Technological change
Improving skills & education
Demographic change
Improvement in governance (e.g. some countries corrupt and mismanaged)

Question 7

LRAS Curve U

Answer 7

(u)

Question 8

Keynesian LRAS Curve

Answer 8

Below Y1 is elastic as output can be increased, because there is high unemployment, workers have little power in demanding wage increases, and because spare resources can be bought without increasing price, inflation will not rise as output rises

In the Long Run, Keynes disagrees with eh Classical LRAS view that wages will fall and go back to equilibrium in a recession, as wages are ‘sticky’, meaning workers will be very reluctant to take a pay cut even in times of recession

Question 9

Neo-classical view of LRAS

Answer 9

In the Long-Run, an economy will always be at full employment level of output, hence why it is vertical

The economy will respond to shocks and return to equilibrium. e.g.in recession, factor prices (WAGES, rents) will fall, as they fall, demand will rise again .