Aggregate Supply

Question 1

What is Aggregate Supply?

Answer 1

The total supply of goods and services available to a particular market from producers

Question 2

What is the shape of the SRAS curve?

Answer 2

Upward sloping — as price level rises, firms increase output

Question 3

Why is SRAS upward sloping?

Answer 3

Because higher prices offset higher production costs and increase profits

Question 4

What is the relationship shown in the SRAS curve?

Answer 4

Positive relationship between price level and national output

Question 5

What does a rightward shift of SRAS mean?

Answer 5

Increased production at every price level (lower costs or higher efficiency)

Question 6

What causes the SRAS to shift to the left?

Answer 6

Higher costs of production — wages, taxes, energy, raw materials

Question 7

What are the main determinants of SRAS?

Answer 7

Wage rates, raw material prices, business taxes, productivity, exchange rates

Question 8

What happens to SRAS if business taxes fall?

Answer 8

It shifts to the right — lower costs, increased supply

Question 9

What happens to SRAS if oil prices rise?

Answer 9

It shifts to the left — energy costs rise, reducing supply

Question 10

What does an increase in productivity do to SRAS?

Answer 10

Shifts it right — more output with the same inputs

Question 11

What does the LRAS curve represent?

Answer 11

The maximum sustainable level of output at full employment.

Question 12

What is the Classical view of LRAS?

Answer 12

It’s vertical — the economy always returns to full employment with no need for government intervention

Question 13

Why is LRAS vertical in the Classical model?

Answer 13

Because wages and prices adjust in the long run

Question 14

What is the Keynesian view of LRAS?

Answer 14

It’s flat at low output, becoming vertical as full employment is reached — due to wage rigidity

Question 15

What is meant by ‘sticky wages’?

Answer 15

Wages do not adjust quickly downwards, leading to unemployment in recessions

Question 16

What is the Q² cell in economics?

Answer 16

The quantity and quality of the 4 factors of production: land, labour, capital, enterprise

Question 17

3 factors that increase LRAS

Answer 17

Better technology
More skilled labour
Increased capital investment

Question 18

What is meant by productivity in LRAS?

Answer 18

Producing more output from the same input — shifts LRAS right

Question 19

What is factor mobility?

Answer 19

The ability of labour and capital to move efficiently across industries and locations

Question 20

What does a fall in National Insurance contributions do to SRAS?

Answer 20

Shifts it right — lower business costs

Question 21

What’s one downside of cutting National Insurance?

Answer 21

May reduce funding for public services

Question 22

What does a fall in global oil prices do to SRAS?

Answer 22

Shifts it right — energy becomes cheaper

Question 23

What might offset the benefit of lower oil prices?

Answer 23

Increased use of polluting vehicles

Question 24

What happens if average real wages fall by 5%?

Answer 24

SRAS shifts right — labour becomes cheaper

Question 25

What could counteract a fall in real wages?

Answer 25

Reduced consumer spending, lowering demand

Question 26

What happens when the cost of carbon credits rises?

Answer 26

SRAS shifts left — production becomes more expensive

Question 27

What happens if energy prices rise by 10%?

Answer 27

SRAS shifts left — higher business costs

Question 28

What could businesses do in response to higher gas prices?

Answer 28

Switch to renewable energy in the long term

Question 29

What happens when semiconductor prices rise by 400%? - (raw materials)

Answer 29

SRAS shifts left — cost of production in tech industries increases

Question 30

What happens if the UK signs a trade deal with India?

Answer 30

SRAS shifts right — improved access to goods and services

Question 31

What’s one potential benefit of a trade deal?

Answer 31

New job opportunities in export industries

Question 32

What happens if the pound depreciates by 6%?

Answer 32

SRAS shifts left — imports become more expensive

Question 33

What’s one effect of reduced EU migration?

Answer 33

SRAS shifts left — fewer low-skilled workers, lower capacity.

Question 34

What is the Natural Rate of Unemployment (NRU)?

Answer 34

The unemployment level from frictional and structural causes even at full employment.

Question 35

What is the current NRU in the UK (approx)?

Answer 35

About 4%

Question 36

What is reflation?

Answer 36

Government policy to boost demand/output after a downturn

Question 37

What is an inflationary effect in AS-AD terms?

Answer 37

Output increases but causes prices to rise, reducing some consumers’ purchasing power

Question 38

What does purchasing power refer to?

Answer 38

The real value of money — what you can buy with it

Question 39

What does a subsidy do to the supply curve?

Answer 39

Shifts it right — lowers costs, increases output

Question 40

Why might governments subsidise renewable energy?

Answer 40

It creates positive externalities — reduces pollution, benefits society.