Question

(12) Show and explain why a change of all of three determinants shifts out the SRAS curve?

(13) Show and explain why a change of all of three determinants shifts in the SRAS curve?

(14) What does a change of each of three determinants shift out the LRAS curve?

(15) What does a change of each of three determinants shift in the SRAS curve?

Answer 1

12).

SRAS curve shows the overall production of the economy as whole that can be produce at the different price level. So, there is a direct relationship between “P” and the overall quantity supplied by the economy as whole. Now, the three factor that leads to outside shift of the SRAS curve is given by, “technological improvement”, “increase in the input supply” and “decrease in the input price”.

So, as the technology improve implied the same level of output can be produced with much lower cost, => the SRAS will shift right side at the given level of price level.

Similarly, if there will be a sudden increase in the input supply, => the price of the input decreases, => production cost will also decreases, => the SRAS will shift right side at the given level of price level.

Now, the price of input can also decreases due to some other reason. So, as the price of the input decreases, => production cost will also decreases, => the SRAS will shift right side at the given level of price level.

13).

If the input availability decreases, => the input price will increases, => production cost will also increases, => the SRAS will shift left side given the price level.

Similarly if there is a negative supply shock that increase the cost of production or input price increases due to some other reasons, => the increase in the cost of production, => there will be a left side shift in the SRAS curve.

14).

In the LR the expected price level can’t be different from the actual price level, => in the LR the expected price is same as actual price and the actual output is same as natural rate of output, => the LRAS is vertical.

Now, if there is a “technological improvement” or “sudden increase in the input supply” leads to increase in the potential output, => the LRAS will shift right side. Now as the price of the input decrees due to some other reason when the input supply remain same, => in the SR output will increase but the LR output will not same, => the LRAS will not shift here.

Similarly, if the input supply decreases or there will be a left side movement of the LRAS but as the negative supply shock the price will increases the LRAS will not shift.