CHAPTER 27 AGGREGATE SUPPLY

Question 1

Aggregate supply curve

Answer 1

The relationship between the average level of prices in the economy and the level of total output

Question 2

Full capacity

Answer 2

The level of output where no extra production can take in the long run with existing resources. The full capacity level of output for an economy is shown by the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply curve.

Question 3

Long-run aggregate supply curve

Answer 3

The aggregate supply curve which assumes that wage rates are variable, both upward or downwards. Classical or supply side economists assume that wage rates are flexible. Keynesian economists assume that wage rates may be ‘sticky downwards’ and hence the economy may operate less than full employment even in the long run.

Question 4

Short-run aggregate supply curve

Answer 4

The upward sloping aggregate supply curve which assumes that money wage rates are fixed

Question 5

Supply side shocks

Answer 5

Factors such as changes in wage rates or commodity prices which cause the short run aggregate supply curve to shift.