Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Macroeconomics Main > 04 Aggregate Supply > Flashcards

04 Aggregate Supply Flashcards

1
Q

How does a rise in price affect aggregate supply?

A

An expansion of aggregate supply.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How does a fall in price affect aggregate supply?

A

A contraction of aggregate supply.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Why is the SRAS curve upward slopping?

A

Because higher prices for goods and services make output more profitable and enable businesses to expand their production by hiring less productive labour and other resources.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are shifts in SRAS caused by?

A

A change in the costs of production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How will firms expand their production when there is a rise in the price level?

A
  • Firms will need to employ more factors of production (such as labour)
  • A rise in price level will incentivise firms to increase their output (production), as firms are likely to face higher costs through employing less productive FoP
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the factors that cause a shift in SRAS?

A 
Employment costs:
- Wages, NI, productivity
Costs of other inputs:
- Costs of raw materials (commodities), exchange rates (SPICED/WPIDEC)
Impact of government:
- Corporation tax
- Pollution permits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What impact will a rise in costs of production, and a leftward shift in SRAS have?

A
  • Fall in economic growth
  • Rise in inflation
  • Fall in economic growth means firms require fewer workers (labour is a derived demand for output)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What impact will a rise in the national minimum wage have on SRAS?

A

It will shift to the left.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does LRAS (long-run aggregate supply) show?

A

The output that an economy can produce when using all its factors of production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why is LRAS perfectly inelastic?

A

There is no relation between price level and real GDP.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does an outward shift of LRAS show?

A

A rise in productive potential.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

The level of the LRAS is caused by a change in either…

A

quantity or quality of the factors of production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Fall in quantity/quality =

A

Fall in LRAS.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Rise in quantity/quality =

A

Rise in LRAS.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Explain how an economy can increase its LRAS.

A

The productivity of labour and capital increases - there is a rise in output per person employed or increased efficiency of technology - or education and training.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define a negative output gap.

A

When the actual output gap of an economy is less than potential output, i.e., productively inefficiency PPF.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Define aggregate supply.

A

All planned production by firms in the economy added together (i.e., the sum of all the industry supply curves in the economy) and it shows how much output UK forms will supply at each price level.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Why does aggregate supply slope rightwards?

A

Because:

  • There is an incentive to produce more at a higher price level
  • As the economy works towards ‘full capacity’ costs will rise, meaning that the price level must rise
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

In a recession, the availability of factors of production are…

A

abundant - plentiful

20
Q

Why is the Keynesian AS curve elastic?

A

Firms can hire new labour without having to pay higher wages (there is spare capacity).

21
Q

In a boom as the economy nears its full capacity, the availability of factors of production are…

A

scarce.

22
Q

Why is the Keynesian AS curve inelastic?

A

Firms have to increase wages to attract new labour.

23
Q

What are the two sections of the Keynesian AS curve?

A

Elastic section

Inelastic section

24
Q

Explain the elastic section of the Keynesian AS curve.

A

well below full employment, AS is very elastic, meaning that even if real output rises the price level won’t rise substantially - workers are scared of losing jobs and keep wage demands low and firms are not going to increase prices as during mass unemployment as average income is low and so can’t afford high prices.

25
Q

Explain the inelastic section of the Keynesian AS curve.

A

Nearer full employment - with many people in jobs, prices can rise as people can afford higher prices and may have to rise as costs (such as raw materials and wages) are rising as the economy reaches full capacity.

26
Q

For Keynesians, in a recession, when AD is low and unemployment is high, governments should examine ways in which to increase AD. For example, the could be through…

A

increasing government spending on infrastructure projects (such as HS2). This increase in government spending will immediately increase the amount of people in work and lead to economic growth.

27
Q

For Keynesians, initially the AS curve is quite…

A

elastic - as AD in the economy increased there are sufficiency un-utilised or under-utilised economic resources in the economy (FoP) that can be quickly used by firms to increase output.
- Therefore government can expand AD with little impact on inflation until the economy reaches its productive capacity - where all resources are being used.

28
Q

For Keynesians, when the economy reaches its productive capacity, any increase AD…

A

won’t add to output but will instead cause inflation - this is because the AS curve is now perfectly inelastic.

29
Q

Define output gap.

A

The difference between actual output and potential output - it can be positive or negative.

30
Q

Actual output < potential output =

A

negative output gap.

31
Q

Actual output > potential output =

A

positive output gap.

32
Q

Actual output = potential output =

A

No output gap

33
Q

Define spare capacity.

A

The extent to which actual output is less than potential output. Spare capacity = negative output gap.

34
Q

The difference between a point on the PPF and a point inside the PPF is the…

A

negative output gap and there is said to be spare capacity in the economy.

35
Q

When do an output gap and spare capacity occur on the Keynesian aggregate supply curve?

A

Spare capacity can occur in an economy when aggregate demand is very low and so actual output is below potential output.

36
Q

When do both an output gap and spare capacity occur on the Keynesian aggregate supply curve?

A

When the economy is operating below the vertical party of aggregate supply.

37
Q

As aggregate demand falls, space capacity will…

A

increase (assuming AS is constant).

38
Q

Define full employment.

A

All workers within the economy who are willing and able to take a job at the going wage rate will be in employment.

39
Q

Full employment =

A

Yfe.

40
Q

What is the name of unemployment that still exists even at full employement?

A

The natural rate of unemployment.

41
Q

If the economy is operating below full employment then there will be a…

A

negative output gap - and some cyclical unemployment.

42
Q

What are the 2 main reasons why (Keynesian) AS may shift?

A
  1. A supply-side shock which will temporarily shift AS due to changes in a firm’s costs
  2. Changes in factors of production - tend to be more long-term
43
Q

Give examples of a supply-side shock

A
  • Wage levels
  • Indirect taxation
  • Costs of production
44
Q

Why will changes in factors of production shift AS (Keynesian)?

A
  • The same factors that increase the PPF and cause economic growth
  • i.e., they increase the productive potential of the economy by changing the nature of factors of production
45
Q

In what 3 ways can productive potential of the economy (AS) be increased?

A
  • An increase in the quantity of factor input
  • An increase in the quality of factor inputs
  • An increase in the efficiency with which factors inputs are used
46
Q

How the government influence AS using supply-side policies? (7)

A
  1. Reduce income tax
  2. Reduce corporation tax
  3. Reduce unemployment benefits
  4. Subsidise research and development
  5. Education and training
  6. Encouragement of small business enterprises
  7. Privatisation and Free Trade

Macroeconomics Main (17 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions