2.3.1 Characteristics of Aggregate Supply (AS)

What does the Aggregate Supply (AS) curve represent?

The total quantity of goods and services producers are willing and able to supply at different price levels, ceteris paribus.

What is the shape of the AS curve in the short run (SRAS)?

Upward sloping.

What is aggregate supply?

The total supply of goods and services produced within an economy at a specific price level at a given time.

What causes a movement along the SRAS curve?

What causes a movement along the SRAS curve?

Define an expansion (or extension) of SRAS.

A rise in real GDP due to an increase in the average price level, shown as a movement up along the SRAS curve.

What is a contraction of SRAS?

A fall in real GDP due to a decrease in the average price level, shown as a movement down along the SRAS curve.

What does “short run” mean in aggregate supply?

A time period where at least one factor of production is fixed.

How do decreased tax rates impact SRAS?

They cause SRAS to increase (shift right), as taxes represent a cost to firms.

What happens to SRAS when input costs rise?

SRAS decreases (shifts left), as fewer goods and services can be produced at the same cost.

How does a stronger currency impact SRAS?

It increases SRAS (shifts right), due to cheaper imports lowering production costs.

What is the relationship between tax rates and SRAS?

An inverse relationship: higher tax rates decrease SRAS, lower tax rates increase it.

What influences long-run aggregate supply?

Changes in the economy’s productive capacity.

Define productive capacity.

The maximum output an economy can produce by improving the quantity and/or quality of its factors of production.

How is long-term economic growth achieved?

By increasing the productive capacity of the economy.

What is a positive output gap (inflationary gap)?

When real output exceeds the full employment level during a period of extreme economic growth.

What is a negative output gap (recessionary gap)?

When real output is below the full employment level during economic slowdown or recession.

What does the Keynesian view say about self-correction?

It believes the economy may not always self-correct and return to full employment without intervention.

What role does the Keynesian model assign to government?

It suggests the government should increase spending to shift aggregate demand and influence economic confidence.

Why is the SRAS curve upward sloping?

Input prices (e.g., wages) are sticky, and higher prices increase profits, encouraging more output.

What is the shape of the AS curve in the long run (LRAS)?

Vertical at the full-employment level of output.

Why is the LRAS curve vertical?

Because all prices, including wages, are flexible, and output is determined by resources and technology, not the price level.

What causes movement along the AS curve?

A change in the price level.

What happens when the price level rises along the SRAS?

Firms increase output, moving up along the SRAS curve.

Give a real-world example of movement along SRAS.

Demand-pull inflation → higher demand raises prices → firms increase production.

What causes a shift of the AS curve?

Changes in non-price level factors (e.g., costs, productivity, technology).

What causes a rightward shift in SRAS?

Lower production costs, better technology, higher productivity.

What causes a leftward shift in SRAS?

Higher production costs, supply shocks (e.g., natural disasters), lower productivity.

Real-world example of a leftward SRAS shift?

COVID-19 pandemic – disrupted supply chains and labor market constraints.

What causes a rightward shift in LRAS?

Economic growth – increased capital, better technology, growing labor force.

What causes a leftward shift in LRAS?

Decreased productive capacity – loss of capital or shrinking labor force.

What are key features of SRAS?

Sticky input prices, temporary changes in production, responsive to profit margins.

What are key features of LRAS?

All prices are flexible; economy operates at full employment.

What determines the position of the LRAS?

Technology, labor force, capital stock, and institutions.

How are SRAS and LRAS connected?

SRAS reflects short-term deviations from full employment; LRAS shows long-run potential output.

What happens over time if the economy is not at full employment?

SRAS adjusts, and the economy returns to its LRAS (potential output) level.