AS + Macroeconomic Equilibrium

Question 1

In the classical model of AS, what is the position of SRAS determined by

Answer 1

Costs of production

Question 2

Define supply side shocks

Answer 2

Changes in costs of production
Factors that cause SRAS to shift

Question 3

Outline the factors that cause SRAS to shift

Answer 3

• the price of wages
• the price of raw materials/ commodities
• oil prices (crucial for all firms- transportation/ access of goods)
• business taxes (VAT, corporation)
• import prices (SPICED/WIDEC)

Question 4

Define SPICED

Answer 4

Strong pound: imports cheap, exports dear

Question 5

Define WIDEC

Answer 5

Weak (pound): imports dear, exports cheap

Question 6

What does the vertical line of LRAS represent?

Answer 6

One level of output the economy will always produce at in the long run

Question 7

Define YFE

Answer 7

The full employment level of output
The maximum level of output an economy can produce using all factors of production at sustainable levels

Question 8

At what point do economists agree an economy is operating at YFE

Answer 8

At the natural rate of unemployment (4.5%)

Question 9

Outline the factors that can cause LRAS to shift

Answer 9

Quantity/ quality of factors of production
- increased quantity: improvement in productive efficiency: fall in long run costs
- increased labour productivity
- improvements to infrastructure (transporting goods is now more streamlined)
- quantity of labour increases (size of labour force: inactive become active, increased immigration)

Question 10

Why is the LRAS curve on the Keynes model bent?

Answer 10

The level of spare capacity in the economy
(The belief that) in the long run, we don’t always operate at YFE

Question 11

When does macroeconomic equilibrium occur?

Answer 11

When AD = AS

Question 12

Outline a classical SRAS graph

Answer 12

Axis: PL, real gdp
Curves: diagonal, upward sloping
Plots: P1, Y1, Y2, Y3

Question 13

Outline a classical LRAS graph

Answer 13

Axis: PL, real gdp
Curves: 3 vertical lines
Plots: YFE1, YFE2, YFE3

Question 14

Outline a Keynesian LRAS graph

Answer 14

Axis: PL, real gdp
Curves: start at the same place then branch out into 3 vertical lines
Plots: YFE1, YFE2, YFE3

Question 15

Outline a Keynesian AS/AS graph

Answer 15

Axis: PL, real gdp
Curves: AD, Keynesian LRAS
Plots: P1, Y1

Question 16

Outline the classical AD/AS graphs

Answer 16

Axis: PL, real gdp
Curves: two diagonal (AD, SRAS), one horizontal (LRAS)
Plots: P1,Y1, YFE (on the LRAS)
- Negative output gap: where the equilibrium is before the full employment level of output
- Positive output gap: where the equilibrium is after the full employment level of output gap