4.2.2.6 Determinants of long-run aggregate supply Quiz: AQA Economics, Unit 2

The 20 questions

1. What does the vertical long-run aggregate supply curve represent?

   • The maximum price level firms will accept
   • The level of output at which inflation is zero
   • The normal capacity level of output of the economy
   • The current level of real GDP in a boom, which can rise above the normal capacity output of the economy for a short period

2. Which of the following is a fundamental determinant of long-run aggregate supply?

   • Technological progress
   • Changes in money wage rates
   • Changes in the price of raw materials
   • Changes in the general price level

3. What is meant by factor mobility?

   • The ability of consumers to switch between different products when relative prices change, which is a measure of demand elasticity
   • The speed at which interest rates change in response to inflation
   • The ability of factors of production to move between different uses and locations
   • The movement of money between different bank accounts

4. What is the shape of the Keynesian aggregate supply curve?

   • Horizontal at low output levels, upward sloping as output rises, and vertical at full employment
   • Horizontal at all output levels, so the price level never changes, which means output can always be expanded without any cost
   • Downward sloping, so higher prices reduce output
   • Vertical at all output levels, so output never changes

5. Why is the banking system described as part of the institutional structure that determines long-run aggregate supply?

   • It provides the finance firms need for investment, which raises productive capacity over time
   • It controls the level of consumer spending in the short run through its lending rules, which determine household demand
   • It decides the minimum wage, which determines the level of unemployment
   • It sets the price level, so it determines the level of short-run supply

6. Which change is most likely to shift long-run aggregate supply to the right?

   • An increase in the quality of the labour force through education and training
   • A rise in the rate of business taxation
   • A fall in the price of imported oil in the short run
   • A rise in money wages paid to workers, which increases the cost of hiring labour and so reduces the number of jobs firms create

7. Which effect of a cut in income tax rates is most likely to affect long-run aggregate supply?

   • It raises aggregate demand by a fixed amount each year, because tax cuts always increase consumer spending in full
   • It may encourage more people to work and more firms to invest, raising productive capacity
   • It reduces the money supply, so inflation falls
   • It reduces the price level in the short run through lower costs

8. A government builds a high-speed rail network that lowers transport costs and widens labour market access. What is the most likely effect on long-run aggregate supply?

   • LRAS is unaffected, because only short-run aggregate supply can change
   • LRAS shifts to the right, as factor mobility and productive capacity increase
   • SRAS shifts to the right but LRAS is unchanged, because transport affects only short-run costs
   • LRAS shifts to the left, as spending on rail reduces productive capacity

9. Net emigration reduces the size of the working population in a country. What is the most likely effect on long-run aggregate supply?

   • LRAS shifts to the left, because the economy's productive capacity falls
   • LRAS shifts to the right, because each remaining worker earns more income, so the economy's productive capacity rises
   • LRAS moves along its curve to a lower price level
   • LRAS is unaffected, because only short-run supply depends on labour

10. Real GDP is 1450 billion pounds and estimated potential output is 1500 billion pounds. What is the output gap?

    • Minus 1450 billion pounds, which is the level of output
    • Zero, because the economy is at normal capacity
    • Minus 50 billion pounds, which is a negative output gap
    • Plus 50 billion pounds, which is a positive output gap

11. A rise in entrepreneurial culture and a greater willingness to start businesses increases the economy's potential. What is the most likely effect?

    • SRAS shifts to the left, as wages rise with business activity, which raises firms' costs and reduces the output they supply
    • LRAS shifts to the right, as more productive capacity becomes available
    • LRAS shifts to the left, as more firms compete for resources
    • Aggregate demand shifts to the left, as consumer spending falls

12. An economy is in deep recession with large spare capacity. An expansion in aggregate demand is most likely to:

    • Reduce both real output and the price level
    • Raise real output with little increase in the price level
    • Reduce real output and raise the price level, because extra demand pushes up costs in an economy with no spare capacity
    • Raise the price level with no change in real output

13. Policies that improve access to bank credit for small firms are most likely to:

    • Raise the price level by increasing the money supply immediately, which lowers the cost of borrowing for all firms and households
    • Shift SRAS to the left in the short run by raising costs
    • Increase productive capacity and shift LRAS to the right over time
    • Reduce aggregate demand by reducing consumer spending

14. Which factor shifts long-run aggregate supply but not short-run aggregate supply?

    • A rise in money wage rates
    • A rise in business taxes
    • A fall in the price of raw materials
    • Improvements in education and skills

15. A country invests heavily in research and development, leading to new technology. Why does this affect long-run but not necessarily short-run aggregate supply?

    • Research spending reduces aggregate demand in the short run, so it does not affect supply in either the short or the long run
    • New technology raises the economy's potential capacity over time, and it takes time to be applied in production
    • New technology lowers the price level immediately, so SRAS does not change
    • Technology affects only the exchange rate, not any aggregate supply curve

16. Does an increase in aggregate demand permanently raise real output on a vertical long-run aggregate supply curve?

    • Yes, it permanently raises real output by the same amount as the rise in demand
    • No, it mainly raises the price level once the economy is at its normal capacity
    • No, it reduces the price level because firms have more output to sell
    • Yes, it raises real output only if money wages are fixed

17. Why might a classical view of aggregate supply differ from a Keynesian view during a recession?

    • Both views assume the same shape of aggregate supply curve in every situation
    • The classical view assumes the economy is near full capacity, while the Keynesian view allows for spare capacity
    • The Keynesian view assumes output is fixed at normal capacity in all periods
    • The classical view assumes no price changes at any output level, which is the opposite of the Keynesian view of prices and output

18. Supply-side policies that improve labour market flexibility are intended to shift which curve, and in what direction?

    • LRAS to the left, by reducing productive capacity through lower labour mobility and weaker incentives to work and invest
    • SRAS to the left, by raising the costs of firms
    • LRAS to the right, by increasing the economy's potential output
    • Aggregate demand to the left, by reducing consumer spending

19. Which best explains why the institutional structure of an economy can affect aggregate supply?

    • Institutions determine only consumer spending, which is unrelated to supply because spending and supply are set separately in every market
    • Financial, legal and regulatory institutions influence investment, enterprise and the efficient use of resources
    • Institutions affect only the exchange rate in the short run
    • Institutions control the money supply directly, so they set the price level

20. The Keynesian AS curve becomes vertical at which point?

    • The point where the exchange rate is fixed by the central bank
    • The point where the price level stops rising in every period
    • Zero output, where firms stop producing altogether
    • Full employment, where the economy has no spare capacity

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