2.3: Aggregate Supply

• What is aggregate supply?

  Aggregate supply is the total supply of goods/services produced within an economy at a specific price level at a given time.
• Why is the aggregate supply (AS) curve upward sloping?

  The AS curve is upward sloping due to the combined supply of all individual supply curves in an economy and increasing costs as real output increases.
• What happens to firms' costs as real output increases?

  As real output increases, firms have to spend more to increase production, leading to higher average prices.
• What is the relationship between average price level (AP) changes and the short run aggregate supply (SRAS) curve?

  A change in the average price level results in a movement along the SRAS curve, with increases causing expansion and decreases causing contraction.
• What causes a shift of the entire SRAS curve?

  A shift of the entire SRAS curve occurs due to changes in the conditions of supply, such as costs of production or productivity changes.
• What happens when costs decrease or productivity increases in relation to the SRAS curve?

  A decrease in costs or an increase in productivity results in the SRAS curve shifting to the right.
• What happens when costs increase or productivity decreases in relation to the SRAS curve?

  An increase in costs or a decrease in productivity results in the SRAS curve shifting to the left.
• What influences short run aggregate supply (SRAS)?

  SRAS is influenced by changes in the costs of production or productivity.
• What does "short run" refer to in economic terms?

  "Short run" refers to the time period where at least one factor of production is fixed.
• What influences long run aggregate supply (LRAS)?

  LRAS is influenced by a change in the productive capacity of the economy.
• How is productive capacity changed in an economy?

  Productive capacity is changed by changes to the quantity or quality of the factors of production.
• What is the relationship between production capacity changes and the production possibilities frontier (PPF)?

  When production capacity changes, it is equivalent to a shift inwards/outwards of the production possibilities frontier (PPF).
• What is required for long-term economic growth?

  Long-term economic growth requires the productive capacity to increase.
• What are some factors that can influence the short-run aggregate supply (SRAS)?

  Changes in costs of raw materials and energy, changes in exchange rates, and changes in tax rates
• How does an increase in costs of raw materials affect SRAS?

  It results in SRAS decreasing, as fewer goods can be produced
• What happens to SRAS when there is a decrease in costs of raw materials?

  SRAS increases, as more goods can be produced
• What is the effect of a decrease in tax rates on SRAS?

  It results in SRAS increasing, as taxes are a cost to firms
• How does an increase in tax rates impact SRAS?

  It results in SRAS decreasing, as taxes are a cost to firms
• What does appreciation of exchange rates indicate for SRAS?

  It means the currency is strong and imports are cheap, thus SRAS increases
• How does depreciation of exchange rates affect SRAS?

  It means the currency is weak and imports are pricey, thus SRAS decreases
• What are the effects of changes in costs of raw materials, tax rates, and exchange rates on short-run aggregate supply (SRAS)?

  • Increase in costs of raw materials: SRAS decreases (shifts left)
  • Decrease in costs of raw materials: SRAS increases (shifts right)
  • Decrease in tax rates: SRAS increases (shifts right)
  • Increase in tax rates: SRAS decreases (shifts left)
  • Appreciation of exchange rates: SRAS increases (shifts right)
  • Depreciation of exchange rates: SRAS decreases (shifts left)
• What does long run aggregate supply (LRAS) depend on?

  It is influenced by a change in the productive capacity of the economy.
• How is productive capacity changed in an economy?

  By changes to the quantity or quality of the factors of production.
• What does total output refer to in the context of an economy?

  It refers to the total output an economy can produce when using all its factors of production and operating at full employment.
• What is the classical view of LRAS at full employment?

  The classical view believes that the LRAS is perfectly inelastic (vertical) at a point of full employment of all available resources.
• What does the point of full employment correspond to on a production possibilities frontier (PPF)?

  It corresponds to the maximum possible output on a production possibilities frontier (PPF).
• What does the classical view suggest about an economy's return to full employment in the long run?

  It suggests that in the long run, an economy will always return to this full employment level of output.
• What are short-run output gaps in the economy?

  They are discrepancies between actual output and potential output in the economy.
• What is an inflationary gap?

  An inflationary gap occurs when real GDP exceeds potential output.
• What is a recessionary gap?

  A recessionary gap occurs when real GDP is less than potential output.
• What does YFE stand for?

  YFE stands for Full Employment level.
• How does Keynes view the long-run aggregate supply curve (LRAS)?

  Keynes believed that the LRAS curve was more L-shaped.
• What does Keynes suggest about supply at lower levels of output?

  Supply is elastic at lower levels of output as there is a lot of spare production capacity in the economy.
• What happens to struggling firms during economic downturns according to Keynes?

  Struggling firms will increase output without raising prices.
• What occurs at the point of full employment (YFE) according to Keynes?

  Supply is perfectly inelastic (vertical) at a point of full employment of all available resources.
• What happens as the economy approaches full employment according to Keynes?

  The closer the economy gets to this point, the more price inflation will occur as firms compete for scarce resources.
• What does the Keynesian view suggest about self-correction in the economy?


  The Keynesian view believes that an economy will not always self-correct and return to the full employment level of output (YFE).