Use of Aggregate Supply Policies

Question 1

Aims of AS Policies

Answer 1

• All AS policies aim to increase the productive capacity (increase AS) of the economy.
• Improve the potential output or growth of the economy
• Increase (shift to the right) the AS curve: Ability and willingness of firms to produce at any given price.

Question 2

AD and AS policy

Answer 2

AD policy works in the short-term to influence the level of spending in an economy

AS policy works in the long-term to influence businesses willingness/ability to produce, and allow for production to expand in a non-inflationary way.

It’s the interaction of AD and AS which influence the achievement of all 3 goals.

Question 3

How AD and AS policies work together

Answer 3

In the short term, AD policies may stimulate growth and create jobs but can also increase inflationary pressures.

In order to grow sustainably, AS policies must work to increase the capacity of the economy over the longer-term.

Question 4

Operation of AS policies

Answer 4

Improving supply-side conditions
- Increase the quality (productivity) or quantity of resources available
- (And/or) Decrease the cost of production for Australian businesses.

Thus shifting the AS curve to the right, and therefore increases total volume of production (AS) –> Leading to an increase in international competitiveness.