Understanding Aggregage Supply

Question 1

What does aggregate supply measure

Answer 1

The volume of goods and services produced each year

Question 2

What is short run aggregate supply

Answer 2

It shows the total planned output when prices can change but the prices and productivity of factor inputs are help constant

Question 3

What is long run aggregate supply

Answer 3

It shows the total planned output when both prices and average wage rates can change - it is a measure of a country’s potential output and the concept is linked to the PPF

Question 4

LRAS curve

Answer 4

Vertical (does not change when the general price level changes)

Question 5

SRAS curve

Answer 5

Assumed to be upward sloping (it is responsive to a change in AD reflected in a change in the general price level)

Question 6

What is the main cause of a shift in AS

Answer 6

Change in business costs

Question 7

What can cause a change in business costs

Answer 7

• changes in unit labour costs
• changes in other production costs
• commodity prices
• exchange rates
• tax and subsidies
• price of imports
• short run shocks to production

Question 8

How do exchange rates create a change in business costs

Answer 8

Exchange rate causes fluctuations in the prices of imported products. Depreciation (fall) in the XR increased the costs of importing raw materials and component supplies from overseas.

Question 9

Why is the exchange rate important for the U.K.

Answer 9

A large percentage of out components / raw materials / energy are imported

Question 10

External factors affecting aggregate supply

Answer 10

• world oil and gas prices
• energy prices / costs
• other mineral / metal prices
• foodstuff prices
• import tariffs / quotas

Question 11

Benefits of falling oil prices

Answer 11

• cheaper for transport
• decline in value of oil exports and cheaper imports
• possible fall in exploration and extraction in the North Sea
• renewable energy may be less economically viable
• brings down inflation - possible deflation
• UK is an oil exporter so the UK XR may fall

Question 12

What happens in the long run

Answer 12

The ability of an economy to produce goods and services and to meet demand is based on the state of production technology and the availability and quality of factor inputs

Question 13

What is trend growth in

Answer 13

The estimated rate of growth of a nation’s productive potential

Question 14

What are the key factors that affect LRAS

Answer 14

• productivity and labour capital
• labour market participation
• innovation and enterprise
• capital investment

Question 15

What does productivity measure

Answer 15

The efficiency of the production process

Question 16

What is productivity in the long run

Answer 16

A major determinant of economic growth and of inflation

Question 17

What does a fall in labour productivity lead to

Answer 17

A rise in firm’s (unit) costs of production (assuming that the level of wages remains the same)

Question 18

Why does the UK economy lag on productivity

Answer 18

• low rate of capital investment
• banking crisis
• slowing rates of inflation
• persistent skills shortages in key industries
• relatively low levels of market competition
• low AD and high spare capacity

Question 19

How does an improvement in labour productivity have an impact on inflation (macro objectives)

Answer 19

Lower inflation - unit costs will be falling

Question 20

How does an improvement in labour productivity have an impact on economic growth (macro objectives)

Answer 20

Higher economic growth - gains in AS

Question 21

How does an improvement in labour productivity have an impact on unemployment (macro objectives)

Answer 21

Lower in LR as growth rises

Question 22

How does an improvement in labour productivity have an impact on balance of taxes are in goods and services (macro objectives)

Answer 22

Improved - more competitive exports

Question 23

How does an improvement in labour productivity have an impact on spare capacity in the economy (macro objectives)

Answer 23

Rise from extra capacity in SR

Question 24

How does an improvement in labour productivity have an impact on business investment (macro objectives)

Answer 24

Higher - profits will have increased

Question 25

How does an improvement in labour productivity have an impact on government fiscal balance (macro objectives)

Answer 25

Productivity gains in government will help to reduce state spending

Question 26

Why is the AS curve non linear

Answer 26

• when spare capacity is high then SRAS will be elastic
• rise in AD can be met easily by increased output
• the elasticity of SRAS curve falls as output increases
• when SRAS becomes perfectly inelastic the economy is at full capacity