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Edexcel A Economics Themes 1 and 2 > Macro 3 - Aggregate Supply > Flashcards

Macro 3 - Aggregate Supply Flashcards

1
Q

Define the term aggregate supply

A

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

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2
Q

How many types of aggregate supply curve are there?

A

2

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3
Q

What are the two different type of aggregate supply curve?

A
  • Short run aggregate supply curve (SRAS)
  • Long run aggregate supply curve (LRAS)
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4
Q

What is the short run aggregate supply curve?

A

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

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5
Q

Which way does the short run aggregate supply curve slope?

A

Upwards

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6
Q

What causes movement along the short run aggregate supply curve?

A

Changes in the price level

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7
Q

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

A

Left

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8
Q

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

A

Right

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9
Q

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

A

Changes in the costs of production

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10
Q

What are exchange rates?

A

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

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11
Q

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?

A
  • SPICED
    Strong Pound Imports Cheap Exports Dear
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12
Q

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

A

The classical model

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13
Q

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

A

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

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14
Q

How is a classical long run aggregate supply curve drawn?

A

It is drawn as a vertical line

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15
Q

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

A

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

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16
Q

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

A

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

17
Q

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

A

Right

18
Q

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

A

Left

19
Q

What are the two different types of LRAS curve?

A
  • The classical LRAS curve
  • The Keynesian LRAS curve
20
Q

What is an output gap?

A

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

21
Q

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

A

See page 13 in pack 3

22
Q

Draw a classical diagram to show a negative output gap

A

See page 13 in pack 3

23
Q

Draw a classical diagram to show a positive output gap

A

See page 13 in pack 3

24
Q

What is a negative output gap?

A

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

25
Q

When is it typical to see a negative output gap?

A

During a recession

26
Q

What is a positive output gap?

A

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

27
Q

When is it typical to see a positive output gap?

A

During an economic boom of a period of high economic growth

28
Q

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

A

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

29
Q

Draw a Keynesian LRAS curve

A

See page 17 in pack 3

30
Q

What shape is a Keynesian LRAS curve?

A

L-shaped

31
Q

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

A

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

32
Q

What is a Keynesian LRAS curve labelled as?

A

AS

33
Q

What is a Keynesian LRAS curve diagram best at showing?

A

Spare capacity and inflation

34
Q

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

A
  • 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
35
Q

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

A
  • 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
36
Q

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

A
  • The economy is working at its maximum productive potential
  • There is perfectly price inelastic supply
  • A rise in aggregate demand will cause inflation only
37
Q

When is it best to use Keynesian diagrams?

A

In evaluation points about changes in aggregate demand

38
Q

Draw a Keynesian diagram with a shift right in LRAS

A

See page 20 in pack 3

Edexcel A Economics Themes 1 and 2 (25 decks)

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