• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Economics Homework- LRAS CURVE AND SRARS CURVE

Extracts from this document...

Introduction

1. With reference to the concept of the multiplier explain how the level of national income might be affected by a new governmentt spending project worth $100 million. (10 marks) An initial change in AD can have a greater final impact on equilibrium national income. This is known as the multiplier effect and it comes about because injections of demand into the circular flow of income stimulate further rounds of spending. If there is an increase in investment of any amount of money, the final increase in national income will increase by more than this value, known as the MULITPLIER EFFECT.An example of this effect would be if a company invested �100m in new factories. The money would be spent on contractors, who would partly use it to pay their workers, who in turn would spend it on anything from food to appliances. If, for example �10m of the total �100m were spent on food, then the food manufacturers would spend this on a variety of products, further increasing the national income. Keynes argued that the multiplier effect would create new jobs within the economy as the spending that caused the creation of one job would indirectly cause the creation of many more. This can be shown using the circular flow of income model. ...read more.

Middle

and the rest will be 'withdrawn' from the circular flow, i.e. it will go to the Government as tax or will be saved. The money that goes back to the firms will again be invested and spent on workers' wages and the cycle continues, with each time the households taking a percentage for tax and savings, before passing the money on again. Hence, the cycle continues until all of the initial �468 million has been withdrawn from the cycle. At this point we can divide the total increase in income (i.e. the addition of all the values that have gone through the firms each time) and divide it by the initial investment to calculate the value of the multiplier. In this way the initial investment will not have caused the creation of 2,000 jobs, but many more. 2. With reference to one factor, explain why some factors might shift the SRAS curve but leave the LRAS curve unchanged. (10 marks) The short-run aggregate supply curve captures the relation between real production and the price level. As the price level rises, real production is greater. As the price level falls, real production also declines. The interaction between the short-run aggregate supply curve and the aggregate demand curve, as well as the long-run aggregate supply curve is the core mechanism of the aggregate market (AS-AD) ...read more.

Conclusion

In the short run, producers respond to higher demand (and prices) by bringing more inputs into the production process and increasing the utilization of their existing inputs. Supply does respond to change in price in the short run - we move up or down the short run aggregate supply curve. In the long run we assume that supply is independent of the price level (money is said to be neutral) - the productive potential of an economy (measured by LRAS) is driven by improvements in productivity and by an expansion of the available factor inputs (more firms, a bigger capital stock, an expanding active labour force etc). As a result we draw the long run aggregate supply curve as vertical. Factors that affect SRAS curve but not the LRAS curve : Wages: This is the price of labor, which works through the resource price determinant. It is the key determinant underlying the self-correction mechanism of the aggregate market. Wages affect the short-run aggregate supply curve, but not the long-run aggregate supply curve. Energy Prices: These are the prices of key energy inputs, especially petroleum, that are essential to any modern industrialized economy. Like wages, energy prices also work through the resource price determinant. Also like labor, energy prices affect the short-run aggregate supply curve, but not the long-run aggregate supply curve. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Equal rights for women in labour market in Lithuania

    There were a reduction in vacancies in the state sector, collapse in the finance sector, many companies went to bankruptcy. The year 2002 was a turning point as unemployment rate began to decrease and reached the least value over the years of independence: the number of workers increased in the service sector, industry and constructions.

  2. Rolls-Royce to axe up to 2,000 workers - discuss.

    Therefore to cut short run costs, the number of jobs have already been reduced and is scheduled for further decrease in 2009. The UK is currently in a recession caused by the financial crisis.

  1. Markets and Price Determination

    if the price of the good increase, the quantity supplied rises, and if its price decreases, the quantity supplied falls.' To produce more of a product, a firm will need to use more factor inputs, which will increase its costs.

  2. Coursework: Is Chester Zoo value for money?

    It is scheduled to open late 2008. Chester Zoo has a wide variety of animals and a lot of uncommon animals which number can just protected when they live with human supervision. There are children's play areas, shops, kiosks and several picnic lawns sited around the zoo.

  1. What is the impact of the Notional Interest Tax Deduction system on investments in ...

    rate be deducted but also the tax rate may be reduced to as much as 26% from the current 33.99% for businesses.8 This will mean that the Belgian tax rate is going to bring tax levels to the European average and will further stimulate investments in comparison to other European countries.

  2. Allocation of Resources

    However, as price rises, firms expand their Marginal Cost (MC) curves, so the resources like land, labor, or capital are moved out of Y's industry and reallocated to X's industry because resources move out of an industry when experiencing losses.

  1. With the aid of at least one diagram and examples, explain the difference between ...

    Nearly all the determinants of supply affect the costs of the firm and, therefore, its supply curve, which is its marginal cost curve. Put simply, if something happens that increases a firm's costs regardless of the price level (e.g. an increase in the wage rate, or an increase in government

  2. Notes on the aggregate demand and aggregate supply curves

    can increase or decrease the money supply. An increase in the money supply gives the banks more money to lend. Typically when banks have more money to lend they will lower their interest rates. When they lower their interest rates businesses are more likely to borrow money to start new projects, or to finance new equipment.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work