LS4- Supply

Question 1

What is aggregate supply?

Answer 1

The total output produced in an economy at a given price level over a period of time

Question 2

What does the SRAS curve show?

Answer 2

Shows the relationship between aggregate output and price level given that wages and FOP are fixed(so is price elastic)

Question 3

What does the SRAS curve slope upwards?

Answer 3

If real output rises, firms will have to pay more to workers(overtime) and more for raw materials so production costs rise, leading to an increase in price level

Question 4

What factors cause a shift of SRAS?

Answer 4

Change in wage rates
Change in raw material prices
Taxation
Exchange rates 
Productivity
Regulation

Question 5

What is LRAS?

Answer 5

LRAS is the productive potential of an economy which is how much output that can be produced at a given price level with a given number of FOP

Question 6

Why is LRAS vertical?

Answer 6

An increase AD will increase price level but won’t cause an increase in output because the economy is already at max capacity

Question 7

What is an output gap?

Answer 7

When output is above or below the long term average rate of growth. At full capacity there is no output gap

Question 8

What factors cause LRAS to shift?

Answer 8

Technological advancements
Changes in productivity
Advancement in skill(human investment)
Investment
Changes in regulation
Demographic changes
Competition changes
Enterprise levels
Factor mobility
Economic incentives
Corruption and bribery

Question 9

What is the classical view of LRAS?

Answer 9

Believe that markets tend to correct themselves fairly quickly when pushed into disequilibrium so in the long run the market will always be in equilibrium and there will be no unemployed resources

Question 10

What is the Keynesian view of LRAS?

Answer 10

They believe that markets fail to clear for long periods of time
At output below full employment there is unemployment so wages should fall
But wages are sticky downwards so the market risks to clear
So wages are stuck
Labour becomes more scare if there is an increase in demand, leading to a higher price level

When the line is horizon there is a lot of spare capacity so output can increase without price increasing but at full employment LRAS is price inelastic