Aggregate Supply (not complete)

Question 1

What is aggregate supply?

Answer 1

Aggregate supply measures the volume of goods and services produced each year.

Question 2

List factors that effect Long Run Aggregate Supply in the long run.

Answer 2

Higher productivity of labour and capital

Increased labour market participation

Gains from innovation and enterprise

Capital investment

Question 3

What causes a shift in AS?

Answer 3

Shifts in AS are caused by non-price factors affecting supply.

Rightward Shift: Indicates an increase in aggregate supply. Causes include reductions in production costs, technological advancements, or improvements in productivity.

Leftward Shift: Indicates a decrease in aggregate supply. Causes include increases in production costs, supply shocks (e.g., natural disasters), or reduced productivity.

Question 4

What causes a movement in AS?

Answer 4

AS Movements are caused by changes in Price levels.

Example: If the price level rises, we move up along the SRAS curve, indicating an increase in the quantity of goods and services supplied.
Real-World Example: During a demand-pull inflation scenario, higher demand raises the price level, and firms respond by increasing production, moving up the SRAS curve.

Question 5

What shifts LRAS?

Answer 5

LRAS Shifts:
Rightward Shift: Reflects long-term economic growth, such as increased capital stock, technological progress, or an increase in the labour force.
Leftward Shift: Reflects a decrease in an economy’s productive capacity, such as due to destruction of capital or a decrease in the labour force.

Question 6

Relationship Between Short-Run AS and Long-Run AS:

Answer 6

SRAS: Prices of some inputs (like wages) are sticky and do not adjust immediately. Firms respond to higher prices by increasing output since they have higher profit margins.
SRAS can be influenced by temporary factors like changes in production costs or expectations.

LRAS: All input prices are flexible, and the economy is at full employment.
Reflects the economy’s maximum sustainable output, given its resources and technology.
Determined by factors like labour force size, capital stock, and technological innovation.