Macro 2.3

Question 1

What is aggregate supply (AS)?

Answer 1

The volume of goods and services produced within the economy at a given price level

It indicates the ability of an economy to produce goods and services and shows the relationship between real GDP and average price levels.

Question 2

What does the AS curve indicate?

Answer 2

The relationship between real GDP and average price levels

It shows how much goods and services can be produced at different price levels.

Question 3

What is the behavior of firms in the short run to increase production?

Answer 3

Firms may increase employee hours, hire temporary workers, or offer overtime incentives

They avoid hiring full-time staff to reduce long-term commitments.

Question 4

What happens to the average and marginal cost of labor per good produced when wages remain constant but production increases?

Answer 4

Both the average and marginal cost of labor per good produced will rise

This is because businesses pay more in wages for every good they produce.

Question 5

Why is the short-run AS curve upward sloping?

Answer 5

Firms are willing to supply more only at higher prices

This reflects the increased costs associated with higher production.

Question 6

True or False: Short-run AS is likely to be elastic.

Answer 6

True

Output is relatively responsive to a change in price.

Question 7

What causes a movement along the AS curve?

Answer 7

A change in price level

This results in either contraction or expansion of supply.

Question 8

What are the fixed factors in the short run on the AS curve?

Answer 8

Money wage rates, factor prices, and state of technology

Changes in these factors result in a shift of the curve.

Question 9

What is the main cause of a shift in short-run AS (SRAS)?

Answer 9

A change in the cost of production

This can be influenced by changes in raw material costs, exchange rates, or tax rates.

Question 10

How do changes in raw material costs affect SRAS?

Answer 10

An increase in costs shifts the SRAS curve left

This reflects higher production costs leading to reduced output at the same price levels.

Question 11

What impact does a weaker pound have on SRAS?

Answer 11

It increases the price of imports, causing SRAS to decrease

This makes production more expensive for businesses.

Question 12

What effect do taxes have on SRAS?

Answer 12

They increase production costs, causing SRAS to shift left

Conversely, subsidies can shift it to the right by decreasing costs.

Question 13

What is a supply-side shock?

Answer 13

Significant changes in factors influencing AS

These can lead to shifts in the SRAS or LRAS curves.

Question 14

In the long run, what limits supply increases?

Answer 14

The availability of people and machines

Once labor productivity is maximized, supply cannot be increased further.

Question 15

What is the classical view of the long-run AS curve (LRAS)?

Answer 15

LRAS is independent of the price level and determined by factors of production and technology

It shows a country’s potential output.

Question 16

What does a rightward shift of LRAS indicate?

Answer 16

Economies can produce more goods

This is similar to an outward shift of the production possibility frontier (PPF).

Question 17

What did Keynes argue about the LRAS curve?

Answer 17

It cannot be vertical because economies can be in disequilibrium for extended periods

This suggests that the relationship between wages, prices, and employment is more complex.

Question 18

What are the reasons why wages tend to be ‘sticky downwards’?

Answer 18

Unions, business demotivation risks, worker wage expectations, labor mobility issues, and minimum wage laws

These factors prevent wages from falling below a certain level.

Question 19

What happens to the LRAS when unemployment is high?

Answer 19

The curve is perfectly elastic

Firms do not need to offer high wages to attract staff.

Question 20

What is the relationship between employment and wage levels as we approach full employment?

Answer 20

As employment rises, firms must offer higher wages to attract workers

This leads to higher average price levels.

Question 21

What does increasing productivity mean in the context of LRAS?

Answer 21

More goods can be produced with the same resources or increasing resources allows more goods to be produced.

This refers to the long-run aggregate supply (LRAS) and its relationship with resource efficiency.

Question 22

What can cause supply-side shocks to the LRAS curve?

Answer 22

Examples include a huge technological advancement or a war.

Supply-side shocks can significantly affect the productive capacity of an economy.

Question 23

How do technological advances affect the LRAS curve?

Answer 23

Improvements in technology shift the LRAS curve to the right, meaning more can be produced.

This is because technology speeds up production processes.

Question 24

What is the impact of increased investment in technology on LRAS?

Answer 24

It increases LRAS as more goods can be produced because there are more machines, etc.

Investment in both new and current technology plays a crucial role in productivity.

Question 25

What factors influence productivity in an economy?

Answer 25

Factors include efficiency, skill of labour, and technology. ## Footnote Productivity is essential for the overall economic output.

Question 26

How does a more productive UK economy affect LRAS?

Answer 26

It encourages production of that good in the UK, leading to increased investment and higher LRAS. ## Footnote Relative productivity can shift economic dynamics significantly.

Question 27

What is the effect of a more skilled workforce on LRAS?

Answer 27

It results in increased output per worker, shifting LRAS to the right. ## Footnote A skilled workforce is crucial for economic efficiency.

Question 28

How can education impact structural unemployment?

Answer 28

Education improves occupational mobility, decreasing structural unemployment as people can switch to new jobs. ## Footnote This enhances the efficient use of resources in the economy.

Question 29

How can government regulations impact LRAS?

Answer 29

They can increase the size of the workforce and encourage people to return to work. ## Footnote Government policies can directly influence labor market dynamics.

Question 30

What are some ways government can increase workforce participation?

Answer 30

* Encouraging return to work * Decreasing inactivity * Offering free childcare * Reducing benefits to motivate job seeking. ## Footnote These measures can significantly shift LRAS.

Question 31

What demographic changes can affect LRAS?

Answer 31

Higher immigration than emigration increases the population and workforce, raising LRAS. ## Footnote The age and skill level of immigrants are also vital considerations.

Question 32

What is the relationship between the working-age population and LRAS?

Answer 32

A larger working-age population increases LRAS as more goods can be produced. ## Footnote Demographics play a critical role in economic productivity.

Question 33

How does competition policy affect LRAS?

Answer 33

Promotes competition among businesses, improving quality and efficiency, which increases LRAS. ## Footnote However, less competition can sometimes foster investment and innovation.

Question 34

True or False: High regulation on businesses will likely increase LRAS.

Answer 34

False ## Footnote High regulation can increase costs and reduce output, thereby limiting LRAS.

Question 35

What is one potential benefit of less competition in a market?

Answer 35

It can encourage investment and innovation, as businesses may seek to protect their ideas. ## Footnote Copyright laws exemplify this by preventing idea copying.