Aggregate supplyn + macreeconomic equilibrium Flashcards
Short run aggregate supply
it is upwards sloping. the position of short run AS is determined by costs of production in the economy. decrease in cost production, shift to the right vice versa.
what can cost of production change in the economy
Wages
Raw Material / commodity prices
oil prices
business taxes (VAT)
import prices (SPICED / WIDEC)
Supply side shocks how do they occur
when SRAS shifts, there is a supply side shock in th economy as it happens very quickly, could be overnight. could be positive or negative when it shifts right or left.
what is YFE. how to go beyond
YFE is the full employment level of output and represents the maximum level of output an economy can produce using all factors of production at sustainable levels. can increase output. beyond YDFE by outputting unsustainably eg too much labour overtime, capital overtime
Why does LRAS shift to the right
Q2CELL, quality and quantity of capital, enterprise, labour, land
improvement in productive efficiency
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increase in labour productivity which increases the quality
increase in investement
increase in infrastructure
increase in quantity of labour (immigration/incentives)
introduction of competition
new resource discoveries
when does macroeconomic equilibrium occur
when AD equals AS
classical economists two types of equilibrium
Long run and short run macroeconomic equilibrium
Short run - when AD equals SRAS but not LRAS. it is short run because we are not YFE, in the long run it will not persist and is therefore known as a recessionary gap. it is known as an inflationary gap when the equilibrium point is beyond YFE because it will eventually go back to YFE when it is unsustainable, therefore is short run.
Long run - when AD equals SARAS and LRAS. there are no inflationary or deflationary gaps.
keynesian way of showing macro economic equilibrium is
wherever AD cuts the LRAS / equals to the LRAS could be long run equilibrium.
Macroeconomic equilibrium shift in AD (classical)
- as AD shits right, there is an increase in economic growth and demand pull inflationary pressure
- as AD shifts to the right, increase in economic growth and demand pull inflationary pressure but now theres YFE to show that theres spare capacity being exhausted, moving towards YFE with the LRAS curve beyond the point of equilibrium
Macroeconomic equilibrium shifts in AD (Keynesian)
as AD shifts to the right shows a economic growth and demand pull inflationary pressure as well as the YFE. when the AD is on the flat line of LRAS, it doesnt show the inflationary pressure and if it was on the vertical part of the LRAS, there wouldn’t be the increase in growth.
- very good for evaluation
Macroeconomic equilibrium shifts of SRAS (CLassical)
as SRAS shifts right, positive side supply side shock, shows an increase in economic growth and a reduction of inflationary pressure, vice versa.
macroeconomic equilibrium shifts of LRAS (classical)
LRAS vertical, and AD curve.
as LRAS shifts right, it shows the increase in both actual and potential growth as well as reduction in cost push inflationary pressure.
macroeconomic equilibrium shift in LRAS (Keynesian)
As LRAS shifts the the right, it shows a new full employment level of output from YFE1 to YFE2.
shows a increase in actual and potential growth as well as. a reduction in cost push inflationary oressure from P1 to P2
why do SRAS curves shift
business cost - labour and raw material costs may rise
exchange rates - increased prices in imports
government may impose taxes - this may cause costs of producing goods or services to increase
what is a supply side shock
it is anything that is positive or negative that causes SRAS to change
- bar harvest, technological improvements, new minerals / resources, etc.
