Macro 3 - Aggregate Supply Flashcards
Define the term aggregate supply
Aggregate supply is the total output produced in an economy at a given price level over a given period of time
How many types of aggregate supply curve are there?
2
What are the two different type of aggregate supply curve?
- Short run aggregate supply curve (SRAS)
- Long run aggregate supply curve (LRAS)
What is the short run aggregate supply curve?
The short run aggregate supply curve is a curve showing how much output firms would be prepared to supply in the short run at any given overall price level
Which way does the short run aggregate supply curve slope?
Upwards
What causes movement along the short run aggregate supply curve?
Changes in the price level
If short run aggregate supply decreases which way will SRAS shift?
Left
If short run aggregate supply increases which way will SRAS shift?
Right
What is the main cause of a shift in the short run aggregate supply curve?
Changes in the costs of production
What are exchange rates?
Exchange rates refer to the cost of one currency expressed in terms of another currency
What acronym can be used to evaluate the effect on imports and exports as a result in a change in the value of the pound?
- SPICED
Strong Pound Imports Cheap Exports Dear
What type of model is represented by a diagram with a regular SRAS and LRAS curve?
The classical model
What does the long run aggregate supply curve (LRAS) show?
The long run aggregate supply curve shows the productive potential of an economy where all resources are being used to full capacity
How is a classical long run aggregate supply curve drawn?
It is drawn as a vertical line
Why is a classical long run aggregate supply curve drawn as a vertical line?
As a change in the price wont cause a change in the output because the economy is already running at full capacity so it can’t create any more output
Which factors cause a shift in the long run aggregate supply curve?
Any factor which causes a change in the productive potential in an economy will cause a shift in the LRAS curve
If the productive potential of an economy increases, which way will the LRAS curve shift?
Right
If the productive potential of an economy decreases, which way will the LRAS curve shift?
Left
What are the two different types of LRAS curve?
- The classical LRAS curve
- The Keynesian LRAS curve
What is an output gap?
An output gap is the difference between actual and potential GDP. If there is an output gap the country is not growing at the trend of potential output
Draw a classical diagram to show an economy operating at its maximum productive potential (an economy without an output gap)
See page 13 in pack 3
Draw a classical diagram to show a negative output gap
See page 13 in pack 3
Draw a classical diagram to show a positive output gap
See page 13 in pack 3
What is a negative output gap?
A negative output gap occurs when actual output is below potential output. Here there are unused factors of production.