Macro 3 - Aggregate Supply

Question 1

Define the term aggregate supply

Answer 1

Aggregate supply is the total output produced in an economy at a given price level over a given period of time

Question 2

How many types of aggregate supply curve are there?

Answer 2

2

Question 3

What are the two different type of aggregate supply curve?

Answer 3

• Short run aggregate supply curve (SRAS)
• Long run aggregate supply curve (LRAS)

Question 4

What is the short run aggregate supply curve?

Answer 4

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

Question 5

Which way does the short run aggregate supply curve slope?

Answer 5

Upwards

Question 6

What causes movement along the short run aggregate supply curve?

Answer 6

Changes in the price level

Question 7

If short run aggregate supply decreases which way will SRAS shift?

Answer 7

Left

Question 8

If short run aggregate supply increases which way will SRAS shift?

Answer 8

Right

Question 9

What is the main cause of a shift in the short run aggregate supply curve?

Answer 9

Changes in the costs of production

Question 10

What are exchange rates?

Answer 10

Exchange rates refer to the cost of one currency expressed in terms of another currency

Question 11

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?

Answer 11

• SPICED
  Strong Pound Imports Cheap Exports Dear

Question 12

What type of model is represented by a diagram with a regular SRAS and LRAS curve?

Answer 12

The classical model

Question 13

What does the long run aggregate supply curve (LRAS) show?

Answer 13

The long run aggregate supply curve shows the productive potential of an economy where all resources are being used to full capacity

Question 14

How is a classical long run aggregate supply curve drawn?

Answer 14

It is drawn as a vertical line

Question 15

Why is a classical long run aggregate supply curve drawn as a vertical line?

Answer 15

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

Question 16

Which factors cause a shift in the long run aggregate supply curve?

Answer 16

Any factor which causes a change in the productive potential in an economy will cause a shift in the LRAS curve

Question 17

If the productive potential of an economy increases, which way will the LRAS curve shift?

Answer 17

Right

Question 18

If the productive potential of an economy decreases, which way will the LRAS curve shift?

Answer 18

Left

Question 19

What are the two different types of LRAS curve?

Answer 19

• The classical LRAS curve
• The Keynesian LRAS curve

Question 20

What is an output gap?

Answer 20

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

Question 21

Draw a classical diagram to show an economy operating at its maximum productive potential (an economy without an output gap)

Answer 21

See page 13 in pack 3

Question 22

Draw a classical diagram to show a negative output gap

Answer 22

See page 13 in pack 3

Question 23

Draw a classical diagram to show a positive output gap

Answer 23

See page 13 in pack 3

Question 24

What is a negative output gap?

Answer 24

A negative output gap occurs when actual output is below potential output. Here there are unused factors of production.

Question 25

When is it typical to see a negative output gap?

Answer 25

During a recession

Question 26

What is a positive output gap?

Answer 26

A positive output gap occurs when actual output exceeds for a period of time potential output. It means the economy is growing faster than trend

Question 27

When is it typical to see a positive output gap?

Answer 27

During an economic boom of a period of high economic growth

Question 28

What is the equilibrium level of real national output (Macroeconomic equilibrium)?

Answer 28

The equilibrium level of real national output is where AD equals AS and there is no tendency to change. It is the point of macroeconomic equilibrium and identifies the price level and real GDP of a country

Question 29

Draw a Keynesian LRAS curve

Answer 29

See page 17 in pack 3

Question 30

What shape is a Keynesian LRAS curve?

Answer 30

L-shaped

Question 31

What is the relationship between a Keynesian LRAS curve and a regular LRAS and SRAS curve?

Answer 31

When drawing a Keynesian LRAS curve you do not need to draw a separate LRAS curve and SRAS curve

Question 32

What is a Keynesian LRAS curve labelled as?

Answer 32

AS

Question 33

What is a Keynesian LRAS curve diagram best at showing?

Answer 33

Spare capacity and inflation

Question 34

What is happening at the horizontal section of a Keynesian LRAS curve?

Answer 34

• At the horizontal section aggregate supply perfectly price elastic
• There is lots of spare capacity
• Firms find it easy to increase output without needing to increase prices and cause inflation, therefore rises in AD at this stage lead to increases in real GDP without an increase in the price level

Question 35

What is happening at the curved section (bottleneck) of a Keynesian LRAS curve?

Answer 35

• The output level is getting closer to the productive potential
• Firms will find it more difficult to recruit workers as less are unemployed, therefore firms way have to offer higher wages causing an increase in the price level and inflation

Question 36

What is happening at the vertical section of a Keynesian LRAS curve?

Answer 36

• The economy is working at its maximum productive potential
• There is perfectly price inelastic supply
• A rise in aggregate demand will cause inflation only

Question 37

When is it best to use Keynesian diagrams?

Answer 37

In evaluation points about changes in aggregate demand

Question 38

Draw a Keynesian diagram with a shift right in LRAS

Answer 38

See page 20 in pack 3