2.5/2.6 Aggregate Supply And Determinants Of Aggregate Supply

Question 1

Aggregate supply definition

Answer 1

The total quantity of output that all the firms in the economy are willing to produce at a given price level

Question 2

Short run aggregate supply definition

Answer 2

Aggregate supply when the level of capital is fixed

Question 3

Long run aggregate supply definition

Answer 3

Aggregate supply when the economy is producing at its production potential

Question 4

What causes SRAS to shift?

Answer 4

Any change in the costs of production

Question 5

What will cause LRAS to shift?

Answer 5

Changes in quantity, quality or productivity of factors of production

Question 6

Institutional structure definition

Answer 6

The financial and legal systems which make it easier for businesses to set up, operate and expand

Question 7

How does institutional structure affect aggregate supply?

Answer 7

• if the financial sector is is effective in channelling funds from savers to borrowers this allows investment for businesses, increasing AS
• increases in LRAS can be achieved if steps are taken to make it easier for businesses to start up, comply with laws ect.

Question 8

What shape is the classical LRAS curve?

Answer 8

Vertical

Question 9

What shape is the Keynesian AS curve?

Answer 9

Curved

Question 10

What are the three parts of the Keynesian AS curve?

Answer 10

• low levels of GDP, easy to find workers without any upward pressures on wages, elastic
• nearing maximum output of GDP harder to find workers and spare capacity without any increase in wages and prices, factors of production become scarce
• inelastic as we reach full employment of factors of production, price level is high and GDP is fixed

Question 11

What effect on unemployment does real national output have?

Answer 11

• increase in real national output leads to a greater demand for workers = reduce unemployment
• decrease in real national output means less workers are need = high unemployment

Question 12

What are the five determinants of SRAS?

Answer 12

• money wage rates
• changes in the cost of raw material
• business taxation
• productivity
• exchange rate changes

Question 13

Determinants of long-run aggregate supply?

Answer 13

• technology
• productivity
• factor mobility
• enterprise = setting up of more firms
• economic incentives and attitudes