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Aggregate Supply & Macro Equilibrium - (2)
Terms in this set (15)
the total output produced in a economy at a given price level or a given time period
What is aggregate supply?
Acts like a regular supply curve, that at higher prices firms are more willing to increase output.
What does the short run aggregate supply curve show?
If the cost of production changes
Why may short run aggregate supply shift in the first place?
changes in wages, price of raw materials and commodities, taxes, import prices, exchange rates
What are some reasons why aggregate demand may shift due to changes in the cost of production?
at the same price level more output can be produced
What does it mean when short run AS shifts inwards?
The maximum level of output a country can produce at a sustainable level, assumed that economy will move to a equilibrium where all resources are being used to full capacity
What is the long run aggregate supply and why is it assumed to be fully vertical?
perfectly inelastic because when prices rise economy cannot increase supply due to already operating at full capacity
What does a perfectly inelastic curve in long run AS mean and why is it perfectly inelastic?
Any changes in the factors of production. improvement in efficiency, labour, technology, investment etc.
Why may long run AS shift and give some reasons?
The curve is horizontal and slopes up until its vertical. At low levels of output AS is completely elastic as there is still lots of spare capacity in the economy and outputs can rise without changes in price. As economy develops there are shortages in supply causing prices to rise. When economy is at full capacity AS is perfectly inelastic and output cant rise anymore
Explain how the Keynesian LRAS curve is like and why its like that?
There is a deflationary gap and their is a unemployment of productive capacity in the economy as they are producing less than the maximum level
What effect does it have on the economy if the macro equilirbium of AD and SRAS is less than the LRAS curve?
There is a inflationary gap and the economy is producing more than the maximum output of LRAS, meaning that factors of production are being used unsustainably and will eventually fall bac
What does it mean if the macro equilibrium of AD and SRAS is more than the LRAS curve?
Shifts in AD only effects SRAS. AD shifts outwards and there is a extansion is SRAS leading to an increase in derived demand for jobs
What effect does a shift in AD have on AS?
LRAS does not extend because its perfectly inelastic. AD shifts outwards and only prices rise
What effect does a shift in AD have on LRAS?
When there is spare capacity slope is very elastic as shifts in AD causes a multiplier effect and results in large changes in output
How would the slope of AS be when there is lots of spare capacity in the economy and why?
Slope is inelastic so a shift in demand would result in very or no increase in output.
How would the slope of AS be when there is not much spare capacity in the economy and why?
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