Part 2 Reading 16

msk2222's version from 2018-01-21 23:54

Section 1

Question Answer
Factors that change the cost of production or expected profit margins will cause the SRAS curve to shiftIn the case of an increase in the money supply, the interest rate declines at each price level because the increase in income (Y) increases saving and rates must decline to induce a corresponding increase in investment spending (I). In each of the other cases considered above, a rightward shift in the AD curve will increase the interest rate at each price level. With the real money supply held constant, the interest rate must rise as income increases. The increase in the interest rate reduces the demand for money at each level of expenditure/income and, therefore, allows expenditure/income to increase without an increase in the money supply. In terms of the quantity theory of money equation, this corresponds to a higher velocity of money, V.
Changes in nominal wagesshift the short-run AS curve because wages are often the largest component of a company’s costs. An increase in nominal wages raises production costs, resulting in a decrease in AS and a leftward shift in the SRAS curve. Lower wages shift the AS curve to the right. It is important to note that changes in nominal wages have no impact on the LRAS curve.
We define the change in unit labor cost as% Change in unit labor cost = % Change in nominal wages – % Change in productivity
Change in Input PricesThe price of raw materials is an important component of cost for many businesses. Lower input prices reduce the cost of production, which, in turn, makes companies willing to produce more at any output price. This is reflected in a rightward shift of the SRAS curve
Change in Expectations about Future PricesThe upshot is that expectations of higher (lower) future prices are likely to shift the SRAS curve to the right (left), but the impact may be modest and/or temporary.
Change in Business Taxes and SubsidiesHigher business taxes increase production costs per unit and shift the short-run AS curve to the left. Business subsidies are a payment from the government to the producer. Subsidies for businesses lower their production costs and shift the SRAS curve to the right.
Change in the Exchange RateAs a result, changes in the exchange rate can affect the cost of production and, therefore, aggregate supply. A higher Yen relative to the Euro will lower the cost of raw materials and intermediate goods imported to Japan from Europe.
Shifts in Long-Run Aggregate SupplyPotential GDP measures the productive capacity of the economy and is the level of real GDP that can be produced at full employment. Potential GDP is not a static concept but can increase each year at a steady rate as the economy’s resource capacity grows. Therefore, any factor increasing the resource base of an economy causes the LRAS curve to shift
These factors include changes insupply of labor and quality of labor forces (human capital); supply of natural resources; supply of physical capital; and productivity and technology.

Section 2

Question Answer
Supply of LaborThe determinants of the labor supply are discussed in more detail in Section 4. Increases in the labor supply shift the LRAS curve to the right. Decreases shift the curve to the left.
Supply of Natural ResourcesNatural resources are essential inputs to the production process and include everything from available land to oil to water. Increased availability of natural resources shifts the LRAS curve to the right.
Supply of Physical Capitalif workers are provided with more and better equipment to use, they should be able to produce more output than they could with the older equipment. Thus, strong growth in business investment, which increases the supply of physical capital, shifts the LRAS curve to the right.
Labor Productivity and TechnologyAnother way to raise the productive capacity of a country is to increase human capital—the quality of the labor force—through training, skills development, and education. Improvement in the quality of the labor force shifts the LRAS curve to the right.
Supply of Human CapitalProductivity measures the efficiency of labor and is the amount of output produced by workers in a given period of time. Advances in technology shift the LRAS curve to the right.
factors shifting the AS curveRightward shifts in the SRAS or LRAS curves are defined as an increase in supply. Leftward shifts in the SRAS or LRAS curves represent a decrease in supply.

Section 3