SRAS & LRAS

Question 1

Define SRAS

Answer 1

the relationship between planned national output (GDP) and the general price level.

Question 2

Why Does the SRAS curve slope upward

Answer 2

The SRAS curve slopes upward from left to right, indicating that as the overall price level in the economy increases, businesses are generally willing to produce a higher quantity of output.

Question 3

What is the Position of the SRAS curve influenced by?

Answer 3

The position of the SRAS curve is influenced by the costs of production, especially input costs such as labour and raw materials. Changes in these costs can shift the SRAS curve.

Question 4

What are the factors to shift the SRAS curve

Answer 4

input prices

technology

government policies

can cause shifts in the SRAS curve, anything which causes a change in the cost of the business

Question 5

What is the difference between Long run curve Keynesian and Classical?

Answer 5

Classical view:

• On the left, the classical view is that LRAS is inelastic. In this case, a rise in AD will cause inflation in the long run. Economic growth requires LRAS to shift to the right.

Keynesian view:

• On the right, the Keynesian view is that there can be spare capacity in the long run (e.g. prolonged recession), therefore an increase in AD can cause higher real GDP (if there is spare capacity).

Different assumptions:

• Classical economists believe that labour markets and product markets are flexible. This wage and price flexibility causes markets to be in equilibrium and leads the economy to be at full employment and LRAS to be inelastic.
• Keynesians believe wages and prices can be ‘sticky’ and not adjust to an equilibrium level. This is one reason why output can be below the full employment level for a considerable time.

Question 6

Define Sticky Wages

Answer 6

Sticky wages is a concept to describe how in the real world, wages may be slow to change and get stuck above the equilibrium because workers resist wage cuts.

Question 7

What are the factors causing sticky wages

Answer 7

minimum wage laws
Strong trade union power

May affect productivity causing businesses not to cut wages

Strikes

Question 8

What are the consequences of sticky wages

Answer 8

unemployment as firms choose layoffs over pay cuts.

Slow recovery

Inflationary pressures: Firms facing cost pressures from sticky wages may choose to raise prices instead

Question 9

How do you calculate index numbers

Answer 9

Current value/Base value x100

Question 10

How do you calculate a current price based of an index number

Answer 10

Divide the price by the index number x 100