Theme 2 - The UK economy - Performance and Policies (2.3 - Aggregate Supply) Flashcards
Define Aggregate Supply [1]
Ref - 2.3.1 - Aggregate Supply
Total of all goods and services produced in an economy each year. [1]
What are the 2 types of aggregate supply? [2]
Ref - 2.3.1 - Aggregate Supply
Long-Run Aggregate Supply [1]
Short-Run Aggregate Supply [1]
Define Short-Run Aggregate Supply [1]
Ref - 2.3.2 - Short-Run AS
The total output when price level is changing, but prices and productivity is constant. [1]
Explain 2 shifts in the short-run aggregate supply curve. [4]
Ref - 2.3.2 - Short-Run AS
An increase in corporation tax increases costs of production [1] so the AS curve shifts inwards [1].
Stronger exchange rates makes imported raw materials cheaper [1] so costs of production fall, shifting AS out. [1]
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
Changes in price level [1]
Expansion [1] or Contraction [1]
Define Long-Run AS [2]
Ref - 2.3.3 - Long Run AS
Total output when prices and wages can change. [1]
It is a measure of a country’s productive potential. [1]
What are the 2 types of Long Run Aggregate Supply curves? [2]
Ref - 2.3.3 - Long Run AS
Classical Long-Run Aggregate Supply [1]
Keynesian Long-Run Aggregate Supply [1]
Explain why the classical LRAS curve is shaped vertical [4]
Ref - 2.3.3 - Long Run AS
- In the LR, all markets will clear [1]
- so there is no gap between actual and potential output in the LR [1]
- so changes in the PL will not affect LRAS [1]
- as the economy will always adjust back to full employment (Yfe) [1]
Explain why the Keynesian LRAS is shaped exponentially. [6]
Ref - 2.3.3 - Long Run AS
- There is lots of spare capacity at the bottom of the curve. [1]
- So increasing RNO does not raise PL largely. [1]
- as the curve exponentially grows, PL starts to increase largely. [1]
- As Yfe is being reached, and factors of production become more expensive. [1]
- Then governments intervene to shift LRAS outwards [1]
- Making sure there is spare capacity in the economy. [1]
What causes shifts in the curves of a Classical and Keynesian Long-Run AS curve? [1]
Ref - 2.3.3 - Long Run AS
The Factors of Production [1]
1. (Land)
2. (Labour)
3. (Capital)
4. (Entrepreneurship)
What is meant by the term “Sticky Wages”? [1]
Ref - 2.3.3 - Long Run AS
When wages are unlikely to change, and therefore stay above the price equilibrium. [1]
Give 2 reasons for sticky wages in an economy. [2]
Ref - 2.3.3 - Long Run AS
Employees refusing to accept a wage cut. [1]
Firms avoiding a loss in morale and productivity, due to wages cuts. [1]
Explain why wages should be cut during an economic recession. [2]
Ref - 2.3.3 - Long Run AS
This would decrease labour costs in an economy, [1] therefore giving firms more money to recover economically. [1]
Explain 2 factors which can cause shifts in the LRAS [4]
Ref - 2.3.3 - Long Run AS
Competition - Greater incentive to be productive to ensure survival, [1] so productive potential increases, as the firm may offer higher wages to improve employee motivation. [1]
Education - Improves human capital of workers, [1] therefore causing a larger skilled workforce, which improves productive potential in an economy. [1]
