Short `Run Aggregate Supply Flashcards
What does the aggregate supply curve show?
The aggregate supply curve shows the level of output in the whole economy at any given level of average prices
What are the two types of aggregate supply?
Short Run Aggregate Supply (SRAS)
Long Run Aggregate Supply (LRAS)
What is Short Run Aggregate Supply?
SRAS refers to the total amount of goods and services that all firms within an economy are willing and able to produce at different price levels in the short run, assuming other factors remain constant
What does the SRAS graph look like?
X axis = Real GDP
Y axis = General Price Level
Upward-sloping curve that shows the direct relationship between real GDP and the general price level of a country
What is the difference between the factors of production in SRAS and LRAS?
Short run when at least one factor of production is fixed
Long run is when all the factors of production are variable
What causes a movement along the SRAS?
Movement along the same SRAS is caused by a change in the general price level or Real GDP
What factors cause shifts in the SRAS curve?
Prices of Raw Materials
Business Taxes and Subsidies
Wage Rates
Supply Shocks
Exchange Rates
How do the prices of raw materials shift SRAS?
A decrease in raw material prices lowers production costs and shifts SRAS to the right
How do business taxes and subsidies shift SRAS?
Increase in taxes reduce profit margins and shift SRAS to the left
Increase in subsidies lower production costs and shifts SRAS to the right
What is a supply shock?
A supply shock is where there is a large change in wage rates, raw material prices or taxation
What is a positive supply shock? How does it affect SRAS?
A positive supply shock are unexpected events that increase productivity or reduce costs. This shifts SRAS to the right
Example: Technological Advancement
What is a negative supply shock? How does it affect SRAS?
A negative supply shock are unexpected events that increase costs. This shifts SRAS to the left
Examples: Natural Disasters
How does an appreciation in the exchange rate shift SRAS?
The appreciation makes the imported goods such as raw materials, capital goods, and energy cheaper. Production costs decrease and SRAS shifts to the right
How does a depreciation in the exchange rate shift SRAS?
A depreciation means the imported goods are more expensive, so raw materials become more costly, causing SRAS to shift to the left
