Limited Time Offer: Save 10% on all 2021 and 2022 Premium Study Packages with promo code: BLOG10    Select your Premium Package »

Aggregate Supply

Aggregate Supply

Aggregate supply refers to the total amount of goods and services that firms in an economy are both willing and able to sell at a given price level.

We must differentiate between the short- and long-run aggregate supply curves.

The Long-run Aggregate Supply (LRAS)

The long run is the conceptual time period where there are no fixed factors of production. In other words, it is long enough to allow wages, prices, and expectations to adjust but not long enough for physical capital to be a variable input. Firms change the supply levels in response to expected economic profits and losses.

Also, capital, labor, and technology contribute to factors that affect the aggregate supply curve because everything in the economy is assumed to be used optimally.

The long-run aggregate supply (LRAS) curve is static. Therefore, it is perfectly vertical, reflecting economists’ belief that the changes in aggregate demand result in a temporary difference in an economy’s output. As a result, in the long run, only one quantity is to be supplied.

the-long-run-aggregate-supply-lras

The Short-run Aggregate Supply (SRAS)

In the short-run, rising prices imply higher profits that justify the expansion of output. In the graph below, a rise in price from \(P_1\) to \(P_2\) shifts the short-run aggregate supply (SRAS) to the left. Compared to the long-run, the nominal wage rate varies with economic conditions. Put another way, high unemployment leads to a fall in nominal wages, and an increase in employment leads to a rise in nominal wages.

the-short-run-aggregate-supply-sras

In the short-run aggregate supply, firms are encouraged to employ more workers. The workers end up being paid slightly higher wages due to the demand and prices of goods and services. This can be seen in booming industries such as the technology industry in Silicon Valley. An increase in wages and raw materials makes the SRAS shift to the left. The inverse is also true.

Question

Which of the following statements is the least accurate regarding the long-run aggregate supply?

A. The long-run aggregate supply curve is static.

B. In the long run, only one quantity is to be supplied.

C. The long-run aggregate supply curve is perfectly horizontal.

Solution

The correct answer is C.

The long-run aggregate supply curve is perfectly vertical, reflecting economists’ belief that the changes in aggregate de mand result in a temporary difference in an economy’s output. 

A and B are incorrect. They are true statements regarding the long-run aggregate supply curve.

Featured Study with Us
CFA® Exam and FRM® Exam Prep Platform offered by AnalystPrep

Study Platform

Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Online Tutoring
    Our videos feature professional educators presenting in-depth explanations of all topics introduced in the curriculum.

    Video Lessons



    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.