Aggregate supply and equilibrium

Question 1

Why is the full capacity LRAS curve perfectly inelastic

Answer 1

Even if the GPL increased, it would not incentivize firms to increase output in the long run

Question 2

What is assumed in full capacity

Answer 2

-That firms are operating with normal utilization of their capacity (they could increase output past full capacity in the short run but this is unsustainable)

• There is no demand-deficient unemployment

Question 3

What determines the position of the LRAS curve

Answer 3

Quality and quantity of factors of production

Question 4

What causes a shift in SRAS

Answer 4

Changes in costs of production

Question 5

What is macroeconomic equilibrium

Answer 5

• short run equilibrium is where the SRAS intersects AD
• long run equilibrium is where the LRAS intersects AD

Question 6

Explain the relationship between AD and unemployment

Answer 6

A fall in AD causes the derived demand for labour to decrease (demand deficient unemployment)

Question 7

What is the supply side revolution

Answer 7

The belief that short term shifts in AD are insufficient for economic growth and there should be a focus on increasing the LRAS

Question 8

Explain the relationship between AD and GPL

Answer 8

A shift out in AD increases the output required so increases GPL (demand-pull inflation)

Question 9

What is a negative output gap

Answer 9

• When actual GDP is less the the full capacity
• caused by a deficiency in AD
• likely to be deflationary with high unemployment

Question 10

What is a positive output gap

Answer 10

• When actual GDP is greater than the full capacity
• Caused by an excess of AD
• likely to be inflationary