2.3 - Aggregate supply (AS)

Question 1

What does the Aggregate Supply (AS) curve show?

Answer 1

It shows the total quantity of goods and services that producers in an economy are willing and able to supply at different price levels.

Question 2

What is the relationship between short-run AS (SRAS) and long-run AS (LRAS)?

Answer 2

• SRAS assumes at least one factor of production is fixed (e.g., capital).
• LRAS assumes all factors of production are variable and shows the economy’s productive capacity.

Question 3

SRAS

Answer 3

It represents the output that firms will produce at various price levels, assuming fixed production capacity and wage levels.

Question 4

Factors influencing SRAS

Answer 4

• Costs of raw materials and energy – Higher costs shift SRAS left.
• Exchange rates – A weaker currency makes imports more expensive, raising production costs and shifting SRAS left.
• Tax rates – Higher taxes (e.g., VAT, corporation tax) raise costs, shifting SRAS left.

Question 5

LRAS

Answer 5

It shows the maximum sustainable level of output in an economy when all resources are fully and efficiently used.

Question 6

Classical LRAS

Answer 6

Vertical, assumes the economy always returns to full employment.

Question 7

Keynesian LRAS

Answer 7

Horizontal at low output (due to spare capacity), then becomes vertical when full capacity is reached.

Question 8

Factors influencing LRAS

Answer 8

*Technological advances – Improve efficiency.

*Productivity – Higher output per unit of input shifts LRAS right.

*Education and skills – Improve labour quality and potential output.

*Government regulation – Excessive regulation may reduce LRAS.

*Demographic changes and migration – Increases in the working population can raise LRAS.

*Competition policy – Encourages innovation and efficiency, boosting LRAS.

Question 9

Explain the Keynesian graph

Answer 9

The price level in the economy is fixed until resources are fully employed. When resources are not fully employed, there is spare capacity in the economy.

Question 10

According to Keynesian theory, what happens to the price level when output increases in a fully employed economy?

Answer 10

Price levels will increase, and therefore, output changes are inflationary.

Question 11

According to Keynesian theory, what happens to the price level when output increases when there is spare capacity?

Answer 11

Output can be increased without affecting the price level or increasing inflation.

Question 12

What shifts the LRAS curve to the right?

Answer 12

Improvements in productive capacity due to increased capital, labour, efficiency, and technology.