Aggregate supply

• What does aggregate supply indicate in an economy?


  It indicates the volume of goods and services produced at a given price level.

  
• How does the AS curve relate to real GDP and average price levels?


  The AS curve shows the relationship between real GDP and average price levels.

  
• What must a business do to increase production in the short run?


  They need to increase the hours of work their employees do.
• Why might firms avoid hiring additional full-time staff in the short run?


  They may not want to commit to permanent staff due to potential future sales declines.
• What incentives might firms offer to encourage overtime work?


  Firms might offer bonuses or pay one and a half times the basic rate for overtime.
• How do average and marginal costs of labor change when production increases?


  Both average and marginal costs of labor per good produced will rise.
• What happens to prices when production costs rise?


  Increased production costs are passed on to consumers in the form of higher prices.

  
• Why is the short-run AS curve upward sloping?


  Firms are willing to supply more only at a higher price.
• What does it mean for short-run AS to be elastic?


  Output is relatively responsive to a change in price, changing by a bigger percentage than price.
• What happens to prices if demand falls in the short run?

  Firms will cut prices to stimulate sales, but reductions will be limited.
• What causes a movement along the AS curve?


  A change in price level causes a movement along the curve.
• What causes a shift in the AS curve?


  A range of other factors, not just price level changes, causes a shift in the curve.
• What is the difference between short-run and long-run AS curves?


  In the short run, at least one factor of production is fixed, while in the long run, all factors are variable.
• What factors are fixed in the short run AS curve?


  Money wage rates, factor prices, and the state of technology are fixed.
• What happens to the AS curve when there is a change in fixed factors?


  A change in fixed factors results in a shift of the AS curve.
• What is the main cause of a shift in short-run AS?


  A change in the cost of production is the main cause of a shift in SRAS.
• How do changes in raw materials and energy costs affect SRAS?


  An increase in these costs shifts the SRAS curve left.
• Why are oil prices significant for SRAS?


  Oil prices affect costs for almost all businesses, influencing the level of SRAS.
• How do exchange rates influence SRAS?

  A weaker pound increases import prices, causing SRAS to decrease.
• What was a consequence of the fall in the pound after Brexit?

  It caused cost-push inflation due to increased import prices.
• How do tax rates affect SRAS?


  Higher taxes increase production costs, shifting SRAS to the left.
• What effect do subsidies have on SRAS?


  Subsidies decrease costs, shifting the SRAS curve to the right.
• What are supply-side shocks?


  Supply-side shocks occur when there are significant changes in production factors.
• What limits supply increase in the long run?


  There is a limit on the number of people and machines available.
• How do wage rates behave in the long run AS curve?


  Wage rates are variable and can change in the long run.
• What is the classical view of the long-run AS curve?


  In the long run, AS is independent of the price level and determined by production factors and technology quality.
• What does the LRAS measure?


  LRAS measures a country’s potential output.
• What does the vertical LRAS curve indicate?


  It indicates that all resources are fully utilized at maximum potential output.
• How can an economy exceed its maximum potential LRAS in the short run?


  By allowing factors of production to work overtime or neglecting maintenance.

  
• What happens to the economy in the long run regarding production limits?

  In the long run, machines will stop, and workers will need breaks, limiting production increases.

  
• What does the classical view suggest about market corrections?


  Markets tend to correct themselves quickly towards equilibrium.
• What is Keynes's view on the LRAS curve?


  Keynes argued that the economy can be in disequilibrium for extended periods, challenging the vertical LRAS curve concept.
• What does point B on the Keynesian LRAS curve represent?


  Point B is where the LRAS curve is vertical, indicating maximum potential output with current resources.
• What happens if the LRAS curve remains vertical according to Keynes?


  If it remained vertical, wages and prices would fall when unemployment exists, leading to increased employment.
• Why do wages tend to be 'sticky downwards'?


  Wages do not fall below a certain level due to union influence and other factors.
• Who expressed the view that the economy can be in disequilibrium for 20-30 years?

  Keynes
• What does Keynes imply about the AS curve in relation to disequilibrium?


  He implies that it can't be correct to assume the AS curve is vertical.
• At which point is the LRAS curve vertical according to Keynes?


  At point B
• What does the vertical LRAS curve at point B represent?


  It represents the maximum potential output with current resources and technology.
• What does Keynes believe about wages in relation to unemployment?


  He believes wages tend to be 'sticky downwards'.