How the macroeconomy works - Aggregate supply, Determinants of SRAS and LRAS

What are the three parts to the Keynesian LRAS curve

- At low levels of real GDP (unemployment assumed high) it is easy for firms to find workers to increase output without any upward pressure on wages and therefore inflation - As real GDP increases closer to maximum, it becomes more difficult to find workers to employ and find spare capacity so there is some upward pressure on wages and therefore, price level - Eventually curve become perfectly inelastic as full employment level of real GDP is reached

What are some examples of changes in costs that will shift SRAS

- Money wage rates - Costs of raw materials - Business taxation - Productivity - Exchange rate

What are the determinants of LRAS (what factors can cause it to shift) (5)

- Technology - Productivity - Factor mobility - Enterprise - Economic incentives and attitudes

What does the institutional structure involve (2)

- how effective financial sector is at channeling funds from savers to borrowers (availability of funds for investment which adds to productive capacity of the economy) - Legal systems which can affect how easily firms can be set up and operate

What causes a shift along SRAS

A change in price level

Define the term long run

A period of time when the costs of factors of production may vary

What is the short-run

A period of time when the prices of factors of production are constant

How can technology affect LRAS

Advances in technology can increase amount firms can produce with the same resources available. This increases the capacity of the economy shifting LRAS to the right

What is the Keynesian LRAS curve

An alternative LRAS curve that shows a different relationship between price level and Quantity supplied and is based on a series of assumptions

How can productivity affect LRAS

As workers become more skilled, they are likely to become more productive meaning more can be produced in the same amount of time. This increases the capacity of the economy and therefore, the LRAS shifts to the right

How would an increase in business taxation lead to a shift in SRAS

Businesses pay tax as a part of their operations. Changes to indirect taxes (e.g. VAT) will influence profitability of production. Higher indirect taxes will shift SRAS to the left

What causes the whole SRAS curve to shift

Changes in costs of production

How does a change in exchange rates lead to a shift in SRAS

Changes to exchange rates alter the price a business pays for imported materials. A fall in the exchange rate will mean imports are more expensive and this will increase production costs for the firm shifting SRAS to the left.

How can enterprise affect LRAS

Encouraging more people to become entrepreneurs and set up their own businesses increases the capacity of the economy shifting LRAS to the right

How can economic incentives and attitudes affect LRAS

Government Policy can shift position of LRAS by tax incentives, benefits and changes in legislation which can affect willingness of workers, how long they work for and how hard they work. Thereby shifting LRAS to the right.

How can factor mobility affect LRAS

How willing workers are to move around the country to fill job vacancies, and how able workers are able to retrain themselves to have transferable skills affects LRAS. Increases in workers willingness to move an retrain themselves improves factor mobility which means an economy can produce more so LRAS shifts to the right

How would an increase in productivity lead to a shift in SRAS

If productivity increases, then firms will find it more profitable to supply greater quantities of output and so SRAS will shift to the right. This is because the firm is producing an increased volume of output in the same time period.

How would an increase in the costs of raw materials lead to a shift in SRAS

If the costs of materials increases, this will reduce profitability of production, leading to firms being less willing to supply output. Higher costs will shift SRAS to the left

How would an increase in money wage rates lead to a shift in SRAS

If wage rates paid to workers increase, then firms will be less willing to supply output as it is less profitable to do so therefore, SRAS shifts to the left

What does the vertical shape of the LRAS curve mean

In the long run, the amount of output firms are willing to produce is unaffected by changes in the price level

What are the two types of Aggregate supply

Short-run aggregate supply Long-run aggregate supply

Why is Keynesian LRAS curve useful in 25 mark essays

Use in evaluation to show an increase in AD may not always be inflationary

What does the institutional structure affect

the ability to increase aggregate supply

Define the term institutional structure

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

What does the LRAS represent

the maximum amount an economy can produce - Normal capacity level of output

Define the term Aggregate supply

the total level of output in the economy at any given price level