Part B Question 1

(a) Give definitions of the short-run (SRAS) and long-run (LRAS) aggregate supply curves. (2 marks)

(b) Explain how each of the following events would affect the LRAS curve. (4 marks)

(i) A higher price level

(ii) An increase in the size of the labour force

(iii) An increase in the quantity of capital goods

(iv) Technological change

(c) Suppose an economy is experiencing a decrease in aggregate demand. Discuss the automatic process that will bring this economy back to the long-run equilibrium in the absence of the government intervention. What role, if any, does "wage stickiness" play in this process? (6 marks)