Theme 2 - The UK economy - Performance and Policies (2.3 - Aggregate Supply)

Question 1

Define Aggregate Supply [1]

Ref - 2.3.1 - Aggregate Supply

Answer 1

Total of all goods and services produced in an economy each year. [1]

Question 2

What are the 2 types of aggregate supply? [2]

Ref - 2.3.1 - Aggregate Supply

Answer 2

Long-Run Aggregate Supply [1]
Short-Run Aggregate Supply [1]

Question 3

Define Short-Run Aggregate Supply [1]

Ref - 2.3.2 - Short-Run AS

Answer 3

The total output when price level is changing, but prices and productivity is constant. [1]

Question 4

What causes the Short-Run Aggregate Supply to shift? [2]

Ref - 2.3.2 - Short-Run AS

Answer 4

Costs of production [1]
e.g. Labour costs, raw material costs. [1]

Question 5

Explain 2 shifts in the short-run aggregate supply curve. [4]

Ref - 2.3.2 - Short-Run AS

Answer 5

An increase in wages will increase the costs of production, [1] so firms will increase their prices of goods, therefore decreasing supply. [1]

An increase in productivity, due to better educated workers, [1] will therefore reduce labour costs in the short term, so supply increases. [1]

Question 6

What causes a movement along the SRAS curve? [1]

What is a movement along the SRAS curve called? [2]

Ref - 2.3.2 - Short-Run AS

Answer 6

Changes in price level [1]

Expansion [1] or Contraction [1]

Question 7

Define Long-Run AS [2]

Ref - 2.3.3 - Long Run AS

Answer 7

Total output when prices and wages can change. [1]

It is a measure of a country’s productive potential. [1]

Question 8

What are the 2 types of Long Run Aggregate Supply curves? [2]

Ref - 2.3.3 - Long Run AS

Answer 8

Classical Long-Run Aggregate Supply [1]

Keynesian Long-Run Aggregate Supply [1]

Question 9

Describe what the Classical Long-Run Aggregate Supply shows. [2]

Ref - 2.3.3 - Long Run AS

Answer 9

The curve is vertical [1], therefore an increase or decrease in prices does not affect aggregate supply. [1]

Question 10

Describe what the Keynesian Long-Run Aggregate Supply shows. [2]

Ref - 2.3.3 - Long Run AS

Answer 10

The curve is expontential [1], therefore this shows government intervention is necessary for economic recovery. [1]

Question 11

What causes shifts in the curves of a Classical Long-Run AS curve? [1]

Ref - 2.3.3 - Long Run AS

Answer 11

The Factors of Production [1]
1. (Land)
2. (Labour)
3. (Capital)
4. (Entrepreneurship)

Question 12

What causes a shift in the curve of a Keynesian Long-Run AS curve? [1]

Ref - 2.3.3 - Long Run AS

Answer 12

The factors of production [1]
1. Land
2. Labour
3. Capital
4. Entrepreneurship

Question 13

What is meant by the term “Sticky Wages”? [1]

Ref - 2.3.3 - Long Run AS

Answer 13

When wages are unlikely to change, and therefore stay above the price equilibrium. [1]

Question 14

Give 2 reasons for sticky wages in an economy. [2]

Ref - 2.3.3 - Long Run AS

Answer 14

Employees refusing to accept a wage cut. [1]
Firms avoiding a loss in morale and productivity, due to wages cuts. [1]

Question 15

Explain why wages should be cut during an economic recession. [2]

Ref - 2.3.3 - Long Run AS

Answer 15

This would decrease labour costs in an economy, [1] therefore giving firms more money to recover economically. [1]

Question 16

Explain 2 factors which can cause shifts in the LRAS [4]

Ref - 2.3.3 - Long Run AS

Answer 16

Competition policy. This gives them a greater incentive to be productive to ensure survival, [1] therefore the productive potential increases due to higher firm productivity. [1]

Education. More education improves the human capital of workers, [1] therefore improving the labour productivity, which improves productive potential in an economy. [1]