THEME 2 - Topic 4 - Aggregate Supply Flashcards
Define aggregate supply
The total output of an economy over a given period of time.
Define short run aggregate supply curve
Shows how much output firms would be prepared to supply in the short run at any given average price level.
Why does the SRAS curve slope upwards?
Because at least 1 factor of production in the short run is fixed (land and capital), if firms wish to expand output, they are likely to employ more labour, increasing costs of production, leading to an increase in average prices.
Define a movement in SRAS curve
Caused by a change in the average price level.
What are shifts in the SRAS curve also referred to as?
Supply side shock.
Define a shift in the SRAS curve
Caused by a change in anything other than the average price level: costs of production, quantity and quality of the factors or production.
Define monetarist school
A group of economists that believe that the macroeconomy always adjusts rapidly to the full employment level of output, and that the monetary policy should be the prime instrument for stabilising the economy.
Define the natural rate of output
Is the long-run equilibrium level of output to which monetarists believe the macroeconomy will always tend to.
Define natural rate of unemployment
Is the rate of unemployment that exists when the economy is in long-run equilibrium.
Define Keynesian school
A group of economists that believed that the macroeconomy could settle at an equilibrium below full employment.
What are the 2 causes of a shift in the LRAS curve?
An increase in the quantity or an improvement in the quality of the factors of production, (Increase in the productive potential of the economy).
What are the 3 stages of the Keynesian LRAS curve?
Unused capacity
Intermediate range
Full capacity
What do monetarists believe will happen when policies are implemented on aggregate demand?
Only a change in price will occur.
