Aggerate supply

• What is aggregate supply?

  Aggregate supply is the quantity of goods and services that producers in an economy are willing and able to supply at a given level of prices.
• What does the Short-Run Aggregate Supply (SRAS) curve represent?

  SRAS shows how much output the economy can generate in the short term at each price level.
• What happens to aggregate supply when the price level rises?

  A rise in the price level causes an expansion of aggregate supply.
• What occurs when the price level falls on aggerate supply?

  A fall in the price level causes a contraction of aggregate supply.
• Why does the short-run AS curve slope upwards?

  The short-run AS curve is upward sloping because higher prices for goods and services make output more profitable, enabling businesses to expand production.
• What might cause an outward shift in the aggregate supply curve?

  An outward shift in the aggregate supply curve might be caused by a rise in labor productivity or a decline in energy costs.
• What are the factors that can shift short-run aggregate supply?

  • Changes in resource availability
  • Wage costs
  • Labour productivity
  • Raw materials and components prices
  • Energy costs (e.g., world price of oil, gas, electricity)
  • Business taxes, subsidies, regulations, and imported costs
  • Changes in government subsidies to certain industries
  • Business rates and costs of meeting regulations
  • Costs of imported components (affected by exchange rates)
• What are supply shocks?

  Supply shocks are events like hurricanes, tsunamis, droughts, flooding, political crises, or civil wars that can affect a country's national output.
• What determines an economy's ability to produce goods and services in the long run?

  In the long run, the ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availability and quality of factor inputs.
• What causes the LRAS line to shift?

  • Changes in labour supply available for production
  • Changes in the stock of capital inputs
  • Changes in the efficiency of allocation of factor inputs
  • Improvements in the quality of factor inputs/productivity
  • Advances in the state of technology
  • Improvements in institutions such as the banking system
• What does an outward shift of the LRAS signify?

  An outward shift of LRAS signifies an increase in long-run potential output and employment.
• How is productivity defined in the context of production?

  Productivity measures the efficiency of the production process.
• What is the relationship between factor inputs, factor productivity, and output?

  Factor inputs (factors of production) plus factor productivity equals output.
• What is the role of productivity in the long run?

  In the long run, productivity is a major determinant of economic growth and inflation.
• What happens to firms' unit costs of production when labor productivity falls?

  A fall in labor productivity leads to a rise in firms' unit costs of production, assuming the level of wages remains the same.
• How does higher productivity affect wages and profits?

  Higher productivity allows a business to pay higher wages and achieve increased profits at the same time.
• What characterizes the Keynesian non-linear SRAS curve?

  • High spare capacity allows a rise in aggregate demand to be met with increased output without raising prices.
  • On the vertical line, capacity is reached, and further aggregate demand increases lead to higher prices without increased output.
• How does the elasticity of the SRAS curve change as output increases?

  The elasticity of the SRAS curve falls as output increases due to diminishing returns and bottlenecks in supply.
• What happens when the economy approaches full capacity?


  When the economy approaches full capacity, resource shortages may occur, and the SRAS becomes vertical.
• What is the effect of higher interest rates on savings?


  The higher the interest rate, the higher the amount people will save.
• How does saving affect overall income in households?


  When households save, it decreases overall income as less money is spent on goods.
• What is the relationship between saving and wages in households?


  Saving decreases spending, leading to lower wages and decreased household income.
• How does a decrease in asset prices affect consumer behavior?


  If asset prices decrease, people will save more to apply for mortgages.
• What factors influence consumer confidence?

  Consumer confidence depends on the state of the economy, such as recession or high inflation rates.
• How does the availability of credit affect consumer spending?


  If bank loans are easily available, people are more likely to save money; if hard to get, they will spend more.
• Who tends to save more, rich people or poor people?


  Rich people save more than poor people.
• How does income redistribution affect consumption?


  Income redistribution, such as subsidies and vouchers, increases consumption and reduces spending.
• What do households do if they expect future inflation to rise?


  Households will reduce spending if they expect inflation to rise.
• What are the main determinants of consumption?


  • Interest rates
  • Level of income
  • Wealth
  • Consumer confidence
  • Availability of credit
  • Distribution of income
  • Expectations of future inflation