Pack 3

Question 1

Define SRAS

Answer 1

How much output firms are prepared to supply in the short run, at any given price level.
•curve shifts due to changes in the cost of production

Question 2

Define LRAS

Answer 2

Shows the productive potential of an economy when all factors of production are changing.

Question 3

Define relative productivity

Answer 3

Output per unit of input, compared to other countries

Question 4

5 factors that could shift LRAS right

Answer 4

• Changes in government competition policy
• Government regulations
• Technological advances
• Changes in relative productivity
• Demographic changes and migration
• Improvements in education and skills

Question 5

Explain, using a diagram, how classical economists think an economy in a negative output gap will return to long run equilibrium through costs falling.

Answer 5

• Costs fall so SRAS
  shifts right from SRAS1 —> SRAS2.
• Brings real GDP from y1 to yf (y2).
• Negative output is removed due to extension in AD.

Question 6

Which factors cause SRAS to shift left

Answer 6

• Higher indirect taxes
• Higher oil or gas costs
• Weaker exchange rate
• Higher wages

Question 7

Positive output gap on classical diagram

Answer 7

POG - Occurs when actual output exceeds potential output.

Diagram:
- Both SRAS and LRAS with equilibrium having a greater y than LRAS.

Question 8

Negative output gap on classical and keynesian diagram

Answer 8

Occurs when actual output is below potential output.

Diagram - Classical:
- Output gap between potential and current output with SRAS, LRAS and AD.

Diagram - Keynesian:
- Output gap between potential productivity and actual productivity.
- No SRAS curve just AD and LRAS.

Question 9

Equilibrium level of real national output is

Answer 9

The level of GDP where aggregate demand meets aggregate supply.