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.
When is it typical to see a negative output gap?
During a recession
What is a positive output gap?
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
When is it typical to see a positive output gap?
During an economic boom of a period of high economic growth
What is the equilibrium level of real national output (Macroeconomic equilibrium)?
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
Draw a Keynesian LRAS curve
See page 17 in pack 3
What shape is a Keynesian LRAS curve?
L-shaped
What is the relationship between a Keynesian LRAS curve and a regular LRAS and SRAS curve?
When drawing a Keynesian LRAS curve you do not need to draw a separate LRAS curve and SRAS curve
What is a Keynesian LRAS curve labelled as?
AS
What is a Keynesian LRAS curve diagram best at showing?
Spare capacity and inflation
What is happening at the horizontal section of a Keynesian LRAS curve?
- 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
What is happening at the curved section (bottleneck) of a Keynesian LRAS curve?
- 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
What is happening at the vertical section of a Keynesian LRAS curve?
- The economy is working at its maximum productive potential
- There is perfectly price inelastic supply
- A rise in aggregate demand will cause inflation only
When is it best to use Keynesian diagrams?
In evaluation points about changes in aggregate demand
Draw a Keynesian diagram with a shift right in LRAS
See page 20 in pack 3
