#Aggregate Supply: Your Night-Before-the-Exam Refresher 🚀

Hey! Let's get you prepped and confident for your AP Macro exam. We're going to break down aggregate supply, focusing on the short-run, and make sure you've got this down cold. Let's jump in!

#Short-Run Aggregate Supply (SRAS)

#What is SRAS?

The Short-Run Aggregate Supply (SRAS) curve shows the total quantity of goods and services that firms are willing and able to produce at various price levels in the short run. Think of it like the supply curve for the entire economy.

• Upward Sloping: SRAS is upward sloping because in the short run, wages and resource prices are 'sticky'—they don't adjust immediately to changes in the price level.
• Positive Relationship: There's a positive relationship between the price level and real GDP output supplied. As the price level rises, firms are incentivized to produce more. 📈
• Movement Along the Curve: A change in the price level causes a movement along the SRAS curve.

#SRAS Curve Visual

* As you can see, when the price level drops from P1 to P2, the real GDP falls from 400 to 300. Also, when the price level rises from P3 to P2, the real GDP rises from 200 to 300. ## Shifters of SRAS

These are factors that cause the entire SRAS curve to shift either to the right (increase in supply) or to the left (decrease in supply).

#RAP Factors

• Resource Prices and Availability (R):
  • Increase in Resource Prices: Leads to a decrease in SRAS (shift left). Think higher oil prices = higher production costs. ⛽
  • Increase in Resource Availability: Leads to an increase in SRAS (shift right). More resources = more production.
• Actions of the Government (A):
  • Regulations: Increased regulations often lead to a decrease in SRAS (shift left). More red tape = higher costs. 📜
  • Subsidies: Increased subsidies often lead to an increase in SRAS (shift right). Government support = lower costs.
  • Taxes: Higher taxes on businesses will decrease SRAS, while lower taxes will increase SRAS.
• Productivity and Technology (P):
  • Technological Improvements: Lead to an increase in SRAS (shift right). Better tech = more output. 💡
  • Increased Productivity: Leads to an increase in SRAS (shift right). More output per worker = more supply.

#Visualizing SRAS Shifts

#SRAS Scenarios: Let's Practice!

Here are a few scenarios to test your understanding. Think about which RAP factor is being affected and whether it would shift the SRAS curve to the right (increase) or left (decrease).

• Scenario 1: The Canadian Prime Minister places new regulations on carbon emissions.
  • Answer: Decrease in aggregate supply. Government regulations increase production costs.
• Scenario 2: An increase in consumer income causes the GDP deflator to rise to 110. * Answer: Movement along the SRAS curve. This is a change in the price level, not a shift of the curve.
• Scenario 3: Automation in the workplace doubles productivity for all firms in Japan.
  • Answer: Increase in aggregate supply. Technology improves productivity.
• Scenario 4: A war with Great Britain destroys Spanish coal refineries.
  • Answer: Decrease in aggregate supply. Resource availability decreases.

#Final Exam Focus

#Key Topics to Review

• SRAS Definition and Slope: Understand why it's upward sloping.
• RAP Shifters: Memorize the RAP acronym and how each factor affects SRAS.
• Distinguish: Movement along vs. shift of the SRAS curve.
• Real-World Scenarios: Practice analyzing how different events impact SRAS.

#Common Question Types

• Multiple Choice: Expect questions that ask you to identify the factors that shift SRAS or to interpret movements along the curve.
• FRQs: Be prepared to draw SRAS curves, show shifts, and explain the impact of various events on output and price levels.

#Last-Minute Tips

• Stay Calm: You've prepared, you know this material.
• Read Carefully: Pay close attention to the wording of each question.
• Draw Graphs: Use graphs to visualize the concepts, especially in FRQs.
• Explain Thoroughly: Don't just state the answer, explain why it's the answer.

#Practice Questions

Practice Question

#Multiple Choice Questions

1. Which of the following would cause a rightward shift of the short-run aggregate supply curve? (A) An increase in the price level (B) A decrease in the price level (C) An increase in resource costs (D) A decrease in resource costs (E) An increase in government regulations

2. If a country experiences a significant increase in productivity, what is the likely effect on the short-run aggregate supply curve? (A) It will shift to the left. (B) It will shift to the right. (C) It will remain unchanged. (D) It will become vertical. (E) It will become horizontal.

3. Which of the following best describes the short-run aggregate supply curve? (A) It is vertical at the full-employment output level. (B) It is horizontal at the current price level. (C) It is upward sloping because wages and resource prices are sticky in the short run. (D) It is downward sloping due to the law of diminishing returns. (E) It is a flat line representing constant costs.

#Free Response Question

Assume the economy is currently in equilibrium at the full employment level of output.

(a) Draw a correctly labeled graph of the short-run aggregate supply (SRAS), long-run aggregate supply (LRAS), and aggregate demand (AD) curves, showing the equilibrium price level (PL) and output (Y).

(b) Suppose there is a significant increase in the price of oil. On your graph in part (a), show the effect of this change on the SRAS curve. Label the new curve SRAS1. (c) Explain the effect of the change in part (b) on the equilibrium price level and output in the short run.

(d) Now, assume the government implements a policy to reduce business regulations. On a new graph, show how this policy would affect the SRAS curve. Label the new curve SRAS2. (e) Explain how the policy in part (d) would affect the equilibrium price level and output in the short run.

#FRQ Scoring Breakdown:

(a) Graph (3 points):

• 1 point: Correctly labeled axes (Price Level on the vertical axis and Real GDP or Output on the horizontal axis).
• 1 point: Correctly drawn and labeled SRAS, LRAS, and AD curves.
• 1 point: Showing the initial equilibrium at the intersection of SRAS, LRAS, and AD, with equilibrium price level (PL) and output (Y).

(b) Oil Price Increase (1 point):

• 1 point: Correctly shifting the SRAS curve to the left and labeling it SRAS1. (c) Explanation of Oil Price Increase (2 points):
• 1 point: Explaining that the increase in oil prices causes a decrease in SRAS, leading to a higher price level.
• 1 point: Explaining that the increase in oil prices causes a decrease in SRAS, leading to a lower output level.

(d) Reduction in Regulations (1 point):

• 1 point: Correctly shifting the SRAS curve to the right and labeling it SRAS2. (e) Explanation of Reduced Regulations (2 points):
• 1 point: Explaining that reduced regulations cause an increase in SRAS, leading to a lower price level.
• 1 point: Explaining that reduced regulations cause an increase in SRAS, leading to a higher output level.

You've got this! Keep up the great work, and go ace that exam! 💪