• 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and the rest will be 'withdrawn' from the circular flow, i.e. it will go to the Government as tax or will be saved.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 Hence, the cycle continues until all of the initial �468 million has been withdrawn from the cycle.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. What is the impact of the Notional Interest Tax Deduction system on investments in ...

    This is shown on Appendix 4. The increase in GDP once again shows a positive shift in statistics with the NITDS enforced in Belgium. 9. Other reasons for investing in Belgium Even prior to the introduction of the NITDS, investors considered Belgium a hotspot due to many reasons.

  2. Allocation of Resources

    Low prices will be charged in order to undercut competitors. Investors will invest in those industries that are most urgently needed to maximize returns, and withdraw capital from those that are less efficient in creating value. Students will be guided to prepare for the most needed (and therefore most remunerative)

  1. Equal rights for women in labour market in Lithuania

    the increase of people in business and workers in private sector and the increase of people in agriculture. In the period of 1990-1997 the number of employers in the state sector decreased by 60%, as the private sector became double what it had been and in the early 1998 the

  2. 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.

  1. Coursework: Is Chester Zoo value for money?

    million, and the size of Chester Zoo is going to be tripled. The estimated completion date is 2020 and will divide the zoo into four zones representing African savannah, grassland, forest and island and wetland habitats. In the next 18 months, Chester Zoo is going to be built a new aquarium building called Origins.

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

    as lower prices means lower profitability, and the incentive facing oil groups is to produce less; a decrease in the quantity sublied (Q1 to Q3).

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