Aggregate Supply

Question 1

Define aggregate supply.

Answer 1

Aggregate supply is the total supply within the economy, of ALL industry.

Question 2

How do we increase output in the short run?

Answer 2

Workers do overtime.

Question 3

List the causes of a shift in the aggregate supply curve.

Answer 3

• Change in taxation (lower taxes increases production)
• Change in cost of raw materials
• Change in wage rate
• Improvements in technology

Question 4

What does the classical model say about supply?

Answer 4

It is fixed at full employment and can only be shifted left/right in the next long run.

Question 5

What does the Keynesian model say about supply?

Answer 5

• We do not always return to full employment; therefore, we have excess capacity in the industry
• Wages don’t always fall, business’ do not always employ more people; meaning output is not maximized
• Price doesn’t change because of spare capacity (unemployed resources)

Question 6

What can cause an increase in supply?

Answer 6

• Government policy
• Change in productivity (working practices)
• Increase in size of workforce