2.3.1 The characteristics of AS Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. The aggregate supply (AS) curve shows:

   • the total spending by households and firms on goods and services at each possible price level during the year
   • the total quantity of goods that foreigners wish to buy from the UK at each exchange rate, which determines the trade balance
   • the relationship between the price level and the total quantity of output firms are willing to supply
   • the relationship between the interest rate set by the central bank and the total money supply in circulation

2. Which change moves the economy along a fixed short-run AS curve rather than shifting it?

   • technological progress raises productivity across the economy, so firms can produce more with the same inputs at every price
   • the government introduces a new tax on firms' profits, which raises costs and lowers the output firms are willing to supply
   • the general price level changes while the determinants of supply are unchanged
   • costs of raw materials rise with the price level unchanged, so firms produce less at every price and the whole curve moves left

3. Which event would move the short-run aggregate supply curve to the left?

   • a rise in technological progress that improves productivity, so firms can produce more output with the same inputs
   • a rise in the costs of energy and raw materials that increases production costs
   • a rise in the price level, with output unchanged, which moves the economy along the existing curve rather than shifting it
   • a fall in the costs of energy that reduces production costs, so firms supply more output at each price level

4. Short-run aggregate supply is upward sloping because:

   • a higher price level reduces firms' revenues and so output rises, because firms cut prices to sell more units
   • firms always produce at full capacity regardless of prices, so output cannot change in response to the price level
   • some input prices, such as wages, are sticky, so higher output prices encourage firms to expand output
   • households demand more goods when prices rise, which pulls firms up the curve and encourages them to supply more output

5. Long-run aggregate supply is typically drawn as:

   • a horizontal line at the current price level
   • a vertical line at the economy's potential (full employment) output
   • a downward sloping line showing lower output at higher prices
   • a line with the same slope as the short-run AS curve

6. Which is the best explanation of why the short-run AS curve is not vertical?

   • The price level has no effect on firms' revenues in any period
   • Wages and other input costs do not adjust immediately to changes in the price level
   • Firms can instantly change their productive capacity in response to prices
   • Output is fixed by the money supply in the short run

7. Which best describes the relationship between short-run and long-run AS?

   • In the long run, the economy returns to potential output as wages and prices adjust fully
   • Long-run AS is determined by the price level, which permanently shifts output
   • Short-run and long-run AS are identical in all economies at all times
   • The short-run AS curve is always vertical, while the long-run curve slopes upwards

8. Which factor shifts the long-run AS curve to the right?

   • a fall in the productivity of the labour force
   • an improvement in technology that raises productive capacity
   • a rise in the rate of inflation across the economy
   • a rise in the rate of unemployment benefit that reduces labour supply

9. What is the effect of a rise in the exchange rate on short-run AS?

   • It shifts the LRAS curve to the left permanently
   • It raises the sterling cost of imported inputs, shifting SRAS to the left
   • It has no effect because the exchange rate only affects demand
   • It lowers the sterling cost of imported inputs, shifting SRAS to the right

10. Which statement about the Keynesian view of LRAS is most accurate?

    • Keynesians argue LRAS is fixed by the money supply in every period, so changes in the money stock set sustainable output
    • Keynesians argue LRAS has no effect on the price level at any output, so inflation depends only on aggregate demand
    • Keynesians argue LRAS is vertical at all levels of output, so demand policies do nothing to change output in any period
    • Keynesians argue that LRAS can be upward sloping at low output, as spare capacity means output can rise without much inflation

11. What do classical economists conclude about the shape of the long-run AS curve?

    • Classical economists argue LRAS is horizontal, so demand changes affect only output and never move the price level
    • Classical economists argue LRAS is upward sloping at all levels of output, so higher prices always bring forth more output
    • Classical economists argue output depends on government spending, so a rise in public expenditure permanently raises potential output
    • Classical economists argue LRAS is vertical, so demand changes affect only the price level in the long run

12. An economy's AS curve shifts left by 10 per cent of output while AD is unchanged. What is the most likely short-run effect?

    • a fall in real output and a rise in the price level
    • a rise in real output and a fall in the price level
    • a rise in both real output and the price level
    • no change in real output or the price level

13. Which statement best evaluates the importance of the distinction between SRAS and LRAS for policy?

    • Policies have identical effects in the short and long run, so the distinction between the two curves is irrelevant to policy choices
    • Demand policies permanently raise potential output by shifting LRAS to the right, so demand management can sustain growth without limit
    • Only supply policies affect the price level in any period, so demand policy is always useless for controlling inflation or output
    • Demand policies may raise output temporarily in the short run, but in the long run they mainly change the price level if capacity is fixed

14. Which change would shift the short-run AS curve to the right?

    • a rise in the general price level across the economy, which moves the economy along the existing SRAS curve
    • a fall in the price of imported oil that lowers firms' input costs
    • an increase in the number of people seeking jobs, which raises labour supply and so the output firms supply at every price
    • a rise in the government's inflation target, which changes firms' and workers' expectations about future prices and wages

15. A rise in employers' National Insurance contributions would most likely:

    • shift long-run AS to the right, as the workforce grows
    • shift short-run AS to the left, as firms' costs of employing labour rise
    • shift aggregate demand to the right, as firms spend more on staff
    • leave all curves unchanged, since taxes do not affect supply

16. Which of these would reduce the economy's potential output in the long run?

    • a rise in the rate of technological progress across industries
    • a fall in the price of imported raw materials
    • a fall in the size of the skilled labour force due to net emigration
    • competition policy that reduces monopoly power in key markets

17. Which factor influencing long-run AS is most directly linked to competition policy?

    • policies that lower the price of imported energy in the short run, which reduces firms' costs and so shifts SRAS, not LRAS
    • policies that encourage new firms to enter markets, raising efficiency and productive potential
    • policies that increase consumer spending on services, which raises demand in the short run with no effect on productive capacity
    • policies that raise the interest rate charged on business loans, which increases borrowing costs and reduces investment and capacity

18. In the classical model, a rise in government spending that is not matched by higher productive capacity will most likely:

    • reduce the price level permanently as demand falls, because public spending crowds out private demand and firms cut prices
    • have no effect on output or prices in any period, since public spending is always offset by lower private spending
    • raise the price level and leave real output unchanged in the long run
    • raise real output permanently with no effect on prices, because the extra spending creates productive capacity the economy can sustain

19. Which of the following is a determinant of short-run AS but not a direct determinant of long-run AS?

    • changes in the education and skills of the workforce
    • changes in the costs of raw materials and energy
    • changes in demographic structure and migration
    • changes in the level of technology

20. Which is the best description of a supply shock?

    • a change in the price level that moves the economy along the AS curve, without any change in firms' costs or capacity
    • a sudden rise in aggregate demand from households and firms, which moves the economy along the AS curve to higher output and prices
    • an unexpected event that suddenly changes firms' costs or productive capacity, shifting the AS curve
    • a shift in the AD curve caused by a change in the exchange rate, which alters the volume of demand for imports and exports

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