Aggregate supply

Question 1

What is aggregate supply influenced by?

Answer 1

Productivity, which is influenced by production costs, level of investment, availability and efficiency of factors of production and supply-side policies

Question 2

On Keynesian aggregate supply diagram, what does:

1. the spare capacity area reflect?
2. the bottle neck area reflect?
3. the full capacity area reflect?

Answer 2

1. in the spare capacity area, the economy can increase output without any cost pressures
2. in the bottle neck capacity area, there are some constrictions in the supply chain causing costs and wage pressures to build up in some areas of the economy.
3. in the full capacity area, AD increases, however in the short run there may be some extra spending, in the long run there’s inflation and no increased output.

Question 3

What factors influence short run aggregate supply?

Answer 3

1. changes in costs of raw material and energy
2. changes in exchange rates
3. changes in tax rates

Question 4

What factors influence long run aggregate supply?

Answer 4

1. technological advances
2. changes in relative productivity
3. changes in education and skills
4. changes in government regulations
5. demographic changes and migration
6. competition policy