AGGREGATE SUPPLY

What is aggregate supply?

TOTAL SUPPLY OF GOODS AND SERVICES PRODUCED within an economy AT A SPECIFIC PRICE LVEL AT A GIVEN TIME.

The aggregate supply curve is DOWNWARD SLOPING

FALSE

Why is the aggregate supply curve UPWARD SLOPING?

The aggregate supply curve is upward sloping due to RISING COSTS AS REAL OUTPUT INCREASES, resulting in HIGHER AVERAGE PRICES

What CAUSES a movement ALONG the SRAS curve?

A movement along the SRAS curve is caused by A CHANGE IN THE AVERAGE PRICE LEVEL in an economy

Define the term EXPANSION (or extension) of SRAS

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?

FALL IN REAL GDP DUE TO A DECREASE IN THE AVERAGE PRICE LEVEL, shown as a MOVEMENT DOWN ALONG the SRAS curve.

What causes a SHIFT of the entire SRAS curve?

A CHANGE IN THE CONDITIONS OF SUPPLY in an economy, such as the COSTS OF PRODUCTION, EXCHANGE RATES AND TAX RATES

How does a DECREASE IN COSTS affect the SRAS curve?

SHIFT RIGHT - increasing output at every price level

State the meaning of SHORT RUN in aggregate supply

THE TIME PERIOD WHERE AT LEAST ONE FACTOR OF PRODUCTION IS FIXED

What is LONG RUN aggregate supply INFLUENCED by?

A CHANGE IN THE PRODUCTIVE CAPACITY of the economy

Define PRODUCTIVE CAPACITY

The maximum output an economy can produce by improving either the QUANTITY, QUALITY OR BOTH of its FACTORS OF PRODUCTION

How is LONG - TERM economic growth achieved?

INCREASING THE PRODUCTIVE CAPACITY OF AN ECONOMY

What are the THREE FACTORS that can influence SHORT - RUN AS?

TAX RATES

EXCHANGE RATES

COSTS OF RAW MATERIALS

How does an increase in the COST OF RAW MATERIALS affect SRAS?

Causes SRAS TO DECREASE, SHIFTING THE CURVE LEFT

How does an APPRECIATION OF THE EXCHANGE RATE affect the SRAS for a country?

SRAS to INCREASE, SHIFTING THE CURVE RIGHT. Imports become CHEAPER which lowers input costs

What is the effect of a DEPRECIATION OF THE EXCHANGE RATE on the SRAS for a country?

Causes the SRAS to DECREASE, SHIFTING THE CURVE LEFT, due to more expensive imports in terms of the country’s own currency, increasing input costs.

How do DECREASED TAX RATES impact the SRAS?

SRAS INCREASES, SHIFTING THE CURVE RIGHT , as taxes represent an additional costs for firms

What is the effect of INCREASED TAX RATES on the SRAS?

SRAS to DECREASE, SHIFTING THE CURVE LEFT, as taxes represent an additional cost for firms.

An APPRECIATION OF THE EXCHANGE RATE leads to more expensive imports (true or false)

FALSE

How do CHEAPER IMPORTS affect the SRAS?

INCREASES, SHIFTING TO THE RIGHT, due to lower input costs for firms

What happens to the SRAS when INPUT COSTS RISE?

When input costs rise, the SRAS DECREASES, SHIFTING THEE CURVE LEFT, as FEWER GOODS/ SERVICES can be produced with the same amount of money.

How does a STRONGER CURRENCY impact the SRAS?

A stronger currency causes the SRAS to INCREASE, SHIFTING THE CURVE RIGHT. This is due to CHEAPER PRICES of imports in terms of the country’s own currency, lowering input costs.

What is the RELATIONSHIP between TAX RATES and the SRAS?

There is an INVERSE relationship between tax rates and the SRAS. WHEN TAX RATES DECREASE THE SRAS INCREASES and when TAX RATES INCREASE THE SRAS DECREASES.

What are the TWO OPPOSING VIEWS on how LRAS works in an economy?

CLASSICAL VIEW & KEYNESIAN VIEW

Describe the CLASSICAL VIEW of LRAS

The classical view of the LRAS curve is that it is PERFECTLY PRIE INELASTIC (VERTICAL) at a real national output with FULL EMPLOYMENT OF ALL AVAILABLE RESOURCES.

What is the KEYNESIAN VIEW of LRAS

The Keynesian view of the LRAS curve is that it is more L- SHAPED, with supply more PRICE ELASTIC AT LOWER LEVELS OF REAL NATIONAL OUTPUT and PERFECTLY PRICE INELASTIC at FULL EMPLOYMENT

How does the CLASSICAL VIEW believe the economy will SELF - CORRECT?

The classical view believes the economy WILL ALWAYS RETURN TO THE FULL EMPLOYMENT LEVEL F REAL NATIONAL OUTPUT IN THE LONG - RUN, but AT A DIFFERENT AVERAGE PRICE LEVEL

What is a POSITIVE OUTPUT GAP or INFLATIONARY GAP?

A positive output gap or inflationary gap is a PERIOD OF EXTREME ECONOMIC GROWTH where REAL NATIONAL OUTPUT EXCEEDS THE FULL EMPLOYMENT LEVEL

Define a NEGATIVE OUTPUT GAP or RECESSIONARY GAP

A negative output gap or recessionary gap is a PERIOD OF ECONOMIC SLOWDOWN OR RECESSION where REAL NATIONAL OUTPUT IS BELOW THE FULL EMPLOYMENT LEVEL.

The Keynesian view believes an ECONOMY WILL ALWAYS SELF CORRECT (TURE OR FALSE)

False

What role does the KEYNESIAN VIEW suggest for the GOVERNMENT?

The Keynesian view suggest the GOVERNMENT SHOULD INCREASE ITS EXPENDITURE TO SHIFT AGGREGATE DEMAND and change negative ‘animal spirits’ in the economy.

What are three factors that can influence LONG - RUN AS?

TECHNOLOGICAL ADVANCES

CHANGES IN RELATIVE PRODUCTIVITY

CHANGES IN EDUCATION AND SKILLS

How do TECHNOLOGICAL ADVANCES affect LRAS?

SHIFTING THE ENTIRE LRAS CURVE OUTWARDS, increasing the potential output of the economy

What is the impact of IMPROVED EDUCATION AND SKILLS on LRAS?

SHIFT THE ENTIRE LRAS CURVE OUTWARDS, increasing the potential output of the economy by enhancing the quality of labour

How does COMPETITION POLICY affect LRAS?

Competition policy can SHIFT THE ENTIRE LRAS CURVE OUTWARDS by preventing monopoly power and increasing the number of firms supplying goods/ services in an economy.