mr kennedy chapter 10 second test

Question 1

What is aggregate supply and what does an AS curve show

Answer 1

• amount of goods and services produced within the economy at a given price level + the level of real national output that producers are prepared to supply at different average price levels
• shows that firms aim to maximise profits, and when the price of a good increases, firms will buy more of it to sell it at a high price to get more profit

Question 2

How is the short run different to long run aggregate supply

Answer 2

short run is when the only FOP to be variable is labour, so if AD increases, businesses will have to pay overtime as the only FOP to increase is labour, meaning higher costs and price level, causing inflation

in the long run, all factors of production are variable, so if AD increases all FOPs can increase so output can increase without causing inflation

Question 3

Draw both the PPF curve and LRAS curve at the foot of Page 340. What do they have in common?

Answer 3

the quantities of the FOPs determine the position of both the PPF and the LRAS curve

an increase in the quantity or quality of FOPs will shift both curves out

Question 4

Draw figue 10.14. What happens to the price level and real GDP as aggregate demand increases from AD1 to AD2 to AD3 and AD4?

Answer 4

• when the AD curve shifts from 1 to 2, the increase in real output is proportionally greater than the rise in price level, because the AD curve isn’t steep
• but when the AD curve shifts from 3 to 4, it is much steeper so as a result the price level increase is much bigger than the increase in real output
• when it gets to AD4, it is at YFE so any further increase in AD results solely in rising price level or inflation.

Question 5

Draw figure 10.15. Next to it list the factors that could cause AS to increase in this way.

Answer 5

factors that cause SRAS to increase:
- fall in businesses’ costs of production such as raw material costs and energy costs
- a fall in labour costs, resulting from a fall in wage costs or an increase in labour productivity by better labour training
- reduction in government taxes such as VAT
- increase in subsidies granted to firms by the government
- technical progress which improves the quality and productivity of capital goods

Question 6

Define long run aggregate supply using information on page 359 (bottom)

Answer 6

the real output that can be supplied when the economy is on its PPF
- when all available factors of production are employed and are producing at their normal capacity

Question 7

List factors that could increase the capacity of the economy (shift the LRAS curve to the right) using information on page 360.

Answer 7

• increase in quantities and quality of capital and labour and other factors of production in the economy
• productivity of FOP, especially labour
• people’s attitudes to hard work
• people’s enterprise, more entrepeneurs
• more economic incentives
• efficiency of the banking system