Theme 2: Aggregate Supply Flashcards

1
Q

Difference between Long Run and Short Run Aggregate Supply

A

SRAS is the period of time when at least one FOP is fixed whereas LRAS is when all FOP are variable.

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2
Q

What shape is the classical LRAS model?

A

vertical

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3
Q

What are the axis for LR diagrams

A

Price level and real GDP

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4
Q

Explain the Keynesian graph

A

The price level in the economy is fixed until resources are fully employed. When resources are not fully employed there is spare capacity in the economy.

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5
Q

According to Keynesian theory what happens to price level when output increases in a fully employed economy.

A

Price level will increase and therefore output changes are inflationary.

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6
Q

According to Keynesian theory what happens to price level when output increases when there is spare capacity?

A

Output can be increased without effecting the price level or increasing inflation.

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7
Q

6 factors influencing long-run AS?

A

-Technological advances, -Changes in relative productivity, -Changes in education and skills, -Changes in government regulation, -Demographic changes and migration, -Competition policy.

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8
Q

Why do technological advances influence the long run AS?

A

If more money is spent on improving tech then the economy can produce goods in larger volumes or improve quality.

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9
Q

Why do changes in relative productivity influence the long run AS?

A

A more productive labour and capital input will produce a larger quantity of output with the same quantity of input.

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10
Q

Why do changes in education and skills influence the long run AS?

A

This improves the quality of human capital so it is more productive or more highly skilled.

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11
Q

Why do changes in government regulations influence the long run AS?

A

Government can limit how productive and efficient a firm can be.

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12
Q

Why do demographic changes and migration influence the long run AS?

A

If inward migration occurs of working age people then the labour force will increase.

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13
Q

Why does competition policy influence the long run AS?

A

A more competitive market encourages firms to be more efficient.

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