LS4 - Short Run Aggregate Supply

Question 1

Aggregate supply

Answer 1

Shows relationship between price level and output.
Sum of all industry supply curves in the economy

Question 2

SRAS

Answer 2

Short Run AS - period in which atleast one FaOPr is fixed
In the short run, SRAS curve is upward sloping, as ouput increases, so does cost of production, and hence price level increases. But price increase is small, comapred to larger increase in output, so PES elastic.

Question 3

Shifts in SRAS

Answer 3

• Wage rates - rise in wage rates - rise in average price level –> increase in cost of production or firms, respond by increasing prices, curve shifts up
• Raw material prices - fall in raw material prices - decrease in average price level –> fall in costs of prod - respond by decreasing prices, curve shifts down
• Taxes - increase in tax - increase in prices –> increases tax burden on firms and consumers, SRAS shifts up
• Exchange rates - fall in exchange rate increases prices of imports, increase in prices throughout economy, SRAS shifts up
• Productivity - improvements in labourforce, decreases costs in short run, so SRAS shifts down

Question 4

LRAS

Answer 4

Long Run AS - real output fixed at a given level, no matter the price level, as all resources are being used up fully, CELL is maximised
LRAS curve is vertical, showing maximum production potential of an economy, where there are no underutilised resources

Question 5

Shifts in LRAS

Answer 5

Improvements in CELL
* Labour producticity - improvements in skills and education of workforce, increase in LRAS
* Size of workforce - increase in immigration of working age individuals increases LRAS, aging population decreases LRAS
* Infrastructure - improvements i infrastrcture such as new roads, easier for firms to transport goods and materials, saves money, increases LRAS
* Technology - improvements in tech can increase capital productivity
* Investment - increased spending on tech, R&D can improve productivity, increasing LRAS
* Economic incentives - improvements in economic incentives can increase AS, such as lowering income tax, to reduce unemployment

Question 6

Classical LRAS

Answer 6

Markets tend to correct themselves quite quickly when pushed into disequilibrium by a shock, so product markets (goods) and factor markets (labour) will be in eq, and so there can be no unemplyed resources - operating at full capacity - VERTICAL LINE

Question 7

Keynesian LRAS

Answer 7

Markets can be below full emplyment level, will take long periods of time to get back to pre-recession, full employment levels - UPWARD SLOPING