Aggregate Supply

Question 1

Short run aggregate supply elasticity

Answer 1

Likely to be elastic, however increase in price will be relatively small

Question 2

Long run aggregate supply

Answer 2

All factors of production variable

Question 3

Factors influencing short-run aggregate supply

Answer 3

Changes in cost of raw materials, changes in exchange rate ( price of imports ), changes in tax rate/subsidies

Question 4

Classical long-run aggregate supply

Answer 4

In the long-run, economy will always return to full capacity of factors of production

Question 5

Keynesian Long-run aggregate supply

Answer 5

Argues against classical LRAS as if curve was vertical wages would fall when unemployment exists, so employment would increase and economy would return to full employment - argument some factors must be stopping return to full factors of production

Question 6

Keynesian ‘Sticky wages’ argument

Answer 6

Wages won’t fall below a certain level because it would make workers unwilling to work - so when high unemployment, LRAS is elastic so wages aren’t high but as employment increases line bends up as scarcer supply of labour so higher wages offered

Question 7

Factors influencing long run AS

Answer 7

Technological advances, changes in relative productivity, changes in education, migration

Question 8

Government methods to influence LRAS

Answer 8

Offer incentives to work ( free childcare ), increase R and D by decreasing business tax, decreasing regulation , increase incentives to set up business by reducing corporation tax, use competition policy to improve efficiency

Question 9

What does the substitution effect mean?

Answer 9

Consumers switching to cheaper products as prices increase