Unit 27 Flashcards Preview

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Flashcards in Unit 27 Deck (5)
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1
Q

What is the aggregate supply curve?

A

The aggregate supply curve is the relationship between the average level of prices in the economy and the level of total output.

2
Q

Define full capacity.

A

Full capacity is the level of output where no extra production can take in the long run with existing resources. The full capacity level for an economy is shown by the classical long-run aggregate supply curve or the vertical part of Keynesian aggregate supply curve.

3
Q

What is the long run aggregate supply curve?

What is the difference between assumptions over wages made by classical and Keynesian economists?

A

This is the aggregate supply curve which assumes that wage rates are variable, both upwards and downwards. Classical or supply-side economists assume that wage rates are flexible. Keynesian economists assume that wage rates may be ‘sticky downwards’ and hence the economy may operate at less than full employment even in the long run.

4
Q

What is the short-run aggregate supply curve?

A

The short-run aggregate supply curve is the upward sloping aggregate supply curve which assumes that money wage rates are fixed.

5
Q

What are supply-side shocks?

A

Supply-side shocks are factors such as changes in wage rates or commodity prices which cause the short-run aggregate supply curve to shift.