2.3 - aggregate supply

Question 1

2.3.1 [characteristics of AS]

what is aggregate supply?

Answer 1

-the total supply of all goods and services available in an economy

Question 2

what is a supply side?

Answer 2

-referring to the ability of producers to produce goods and services and , hence, output [GDP]

Question 3

SRAS?

Answer 3

-total available supply in the short run

Question 4

shape of AS curve in the short run?

Answer 4

Prices of inputs (like wages) are sticky and do not adjust immediately to changes in the price level.

Higher prices can temporarily increase profit margins, leading firms to increase production.

Question 5

shape of AS in the long run?

Answer 5

In the long run, all prices, including wages, are flexible.

Output is determined by factors such as technology, resources, and institutions, not by the price level.

Question 6

right shift SRAS?

Answer 6

Indicates an increase in aggregate supply. Causes include reductions in production costs, technological advancements, or improvements in productivity.

Question 7

left shift SRAS?

Answer 7

Indicates a decrease in aggregate supply. Causes include increases in production costs, supply shocks (e.g., natural disasters), or reduced productivity.

Question 8

right shift LRAS?

Answer 8

Reflects long-term economic growth, such as increased capital stock, technological progress, or an increase in the labour force.

Question 9

left shift LRAS?

Answer 9

Reflects a decrease in an economy’s productive capacity, such as due to destruction of capital or a decrease in the labour force.

Question 10

key points; SRAS?

Answer 10

Prices of some inputs (like wages) are sticky and do not adjust immediately.
Firms respond to higher prices by increasing output since they have higher profit margins.
SRAS can be influenced by temporary factors like changes in production costs or expectations.

Question 11

key points;
LRAS?

Answer 11

All input prices are flexible, and the economy is at full employment.
Reflects the economy’s maximum sustainable output, given its resources and technology.
Determined by factors like labour force size, capital stock, and technological innovation.

Question 12

connection between LRAS and SRAS?

Answer 12

In the short run, deviations from full employment can occur, causing the SRAS to shift.

In the long run, the economy adjusts to its potential output level, reflected by a vertical LRAS curve.

Question 13

2.3.2 [short run AS]

what 3 thing influence SRAS?

Answer 13

1- changes in cost of raw materials and energy

2-changes in exchange rates

3- changes in tax rates

Question 14

changes in cost of raw materials explanation?

Answer 14

Changes in the costs of raw materials and energy directly affect production costs for firms.

Higher costs increase the overall cost of production, shifting the SRAS curve to the left.

Lower costs decrease production costs, shifting the SRAS curve to the right.

Question 15

impact in change in costs of raw materials on SRAS;

increase in costs

Answer 15

Example: A rise in oil prices increases transportation and production costs across industries.
Result: Firms reduce output at existing price levels, shifting the SRAS curve leftward.

Question 16

explanation of how changes in exchange rates affect SRAS?

Answer 16

Exchange rates influence the cost of imported goods and services.
A stronger domestic currency makes imports cheaper, reducing production costs.
A weaker domestic currency makes imports more expensive, increasing production costs.

Question 16

impact in change in costs of raw materials on SRAS;

decrease in costs

Answer 16

Example: A significant discovery of natural resources, such as shale gas, lowers energy costs.
Result: Firms can produce more at lower costs, shifting the SRAS curve rightward.

Question 17

2.3.3 [LRAS]

what direction is LRAS?

Answer 17

-vertical

Question 18

what factors affect LRAS?

Answer 18

-technological advances
-changes in relative productivity
-changes in education and skills
-changes in gov regulation
-demographic changes
-competition policy

Question 19

what is LRAS influenced by?

Answer 19

-by a change in productive capacity of an economy

Question 20

what is productive capacity changed by?

Answer 20

-changes to the quality or quantity of the factors of production

Question 21

classical view of LRAS?

Answer 21

-believe LRAS is perfectly inelastic at a point of full employment of all available resources
-this point corresponds to the maximum possible output on a PPF

Question 22

classical LRAS curve;

key points?

Answer 22

Assumes that markets clear and that supply creates its own demand (Say’s Law).

Long-term output is not affected by changes in the price level.

Suggests that any government intervention is unnecessary and potentially harmful, as the economy self-adjusts to full employment.

Question 23

Keynesian AS curve;

horizontal segment

Answer 23

At low levels of output and employment, the curve is horizontal. This indicates that firms can increase production without raising prices due to unused capacity and high unemployment.

Question 24

Keynesian AS curve; curved section

Answer 24

: As the economy approaches full employment, the curve starts to slope upwards, reflecting increasing pressure on wages and prices.

Question 25

Keynesian AS curve; vertical section

Answer 25

At full employment, the curve becomes vertical, indicating that output is at its maximum sustainable level, and any further demand increase will only lead to higher prices.

Question 26

Key insights for the Keynesian AS curve

Answer 26

Emphasizes the existence of unemployment and idle capacity in the economy. Suggests that in the short run, output can be increased without causing inflation until full employment is reached. Government intervention, such as fiscal policy, can help achieve full employment without causing inflation in the short run.

Question 27

why may there be short run output gaps in the economy?

Answer 27

-during extreme periods of economic growth, an inflationary gap can develop --> in the long run this will self correct and return to the long run level of output, but at a higher average price level

Question 28

Keynesians; self correcting economy

Answer 28

-believe economy will not self correct --they believe the gov should increase expenditure to shift AD and change the 'negative animal spirits' in the economy

Question 29

Keynisian curve LRAS?

Answer 29

-low output = high unemployment and low confidence -stops further investment and reduces further consumption

Question 30

2.3.2 Changing exchange rates Impact on SRAS: Appreciation of Domestic Currency:

Answer 30

Example: If the US dollar appreciates against the euro, the cost of importing raw materials from Europe decreases. Result: Lower production costs shift the SRAS curve to the right.

Question 31

Changing exchange rates Impact on SRAS: depreciation of domestic currency

Answer 31

Example: If the US dollar depreciates against the yen, the cost of importing components from Japan increases. Result: Higher production costs shift the SRAS curve to the left.

Question 32

explanation of how changes in tax rates affect SRAS?

Answer 32

Changes in tax rates on businesses affect their cost structures and profitability. Higher tax rates increase costs, reducing supply. Lower tax rates decrease costs, increasing supply.

Question 33

changes in tax rates, Impact on SRAS: increase in tax rates

Answer 33

Example: An increase in corporate taxes raises the cost of doing business. Result: Firms reduce output at existing price levels, shifting the SRAS curve leftward.

Question 34

changes in tax rates, Impact on SRAS: decrease in tax rates

Answer 34

Example: A reduction in payroll taxes lowers the cost of labour. Result: Firms can afford to produce more, shifting the SRAS curve rightward.