Macro 5 - Aggregate supply

Question 1

Aggregate supply definition

Answer 1

Total value of goods + services produced in an economy over a given time period

Question 2

What does the keynesian aggregate supply curve (Long run AS curve) look like?

Answer 2

Question 3

What is the first main section of the AS curve?

Answer 3

1. When output is low, and unemployment is high, firms can increase output without an increase in prices.

Question 4

Why can firms increase output without an increase in prices when output is low and unemployment is high?

Answer 4

Because, at low levels of output the AS is greater than AD which means there is excess stock left over, suggesting there is a lack of demand, firms pay off workers and surplus stock means prices will fall.

Question 5

What is the second section of the AS curve?

Answer 5

As output increases, a point is eventually reached that any further output will be met by an increase in prices

Question 6

Why is there a point on the AS curve that any further output would result in an increase in prices?

Answer 6

As demand for goods and services increase, firms hire workers due to derived demand and unemployment decreases. Eventually, factors of production become scarce, and costs must rise.

Question 7

What is the third section of the AS curve?

Answer 7

Eventually AS reaches full capacity, which means output cannot be increased without increasing prices, shifting PPF curve.

Question 8

What does the vertical / Neo - classical LRAS curve look like?

Answer 8

Question 9

What does the Neo classical economists believe about the factors of production in an economy.

Answer 9

Neo classicals believe that the factors of production are all fully employed and there is no spare capacity in an economy.

Question 10

What assumption is the SRAS Short run aggregate supply curve rely on?

Answer 10

That firms can temporarily increase output by employing more workers.

Question 11

What does a shift in AS mean?

Answer 11

the total output producers are willing and able to supply changes at any given price level.

Question 12

What are the main factors that cause SRAS to shift in the short run

Answer 12

costs of production like raw materials, wages and indirect taxes

Question 13

How does wages affect costs of production?

Answer 13

Wages increase, so costs of production increase, wages form largest proportion of total costs, SRAS curve shifts left

Question 14

How does immigration affect costs of production?

Answer 14

immigration increases, supply of labour increases, surplus of labour means wages fall, SRAS curve shifts right

Question 15

How does Raw material costs affect costs of production?

Answer 15

Raw materials price increases, cost of production increases, SRAS curve shifts to the left

Question 16

How does indirect tax and subsidies affect costs of production?

Answer 16

Indirect tax increases, costs of production increase, SRAS shifts to the left.

Subsidies increase, cost of production decreases, SRAS shift to the right.

Question 17

How does exchange rates affect costs of production?

Answer 17

weak pound, cost of importing raw materials increases, SRAS shifts left

Question 18

When will the long run aggregate supply curve shift?

Answer 18

When there is a change in productive capacity. (Quantity and quality of factors of production)

Question 19

How does the labour factor of production change in quality and quantity?

Answer 19

Training and immigration

Question 20

How does the capital factor of production change in quality and quantity?

Answer 20

good quality capital more capital

Question 21

How does the land factor of production change in quality and quantity?

Answer 21

fertilisation and buy more land

Question 22

How does the enterprise factor of production change in quality and quantity?

Answer 22

increase subsidies and enterprise zones