How do short-run and long-run aggregate supply differ, and how is macroeconomic equilibrium determined?
2.2 Aggregate supply and equilibrium: short-run and long-run aggregate supply, the Keynesian and classical LRAS views, macroeconomic equilibrium, and the effect of AD and AS shifts on output and the price level.
An OCR H460 answer to aggregate supply and equilibrium, covering short-run and long-run aggregate supply, the Keynesian and classical views of LRAS, how macroeconomic equilibrium is determined, and the effect of shifts in AD and AS on output, employment and the price level.
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What this dot point is asking
OCR wants you to distinguish short-run from long-run aggregate supply, to explain the Keynesian and classical views of the long-run AS curve, to find macroeconomic equilibrium where AD meets AS, and to analyse the effect of AD and AS shifts on output, employment and the price level.
Short-run aggregate supply
A leftward SRAS shift (a negative supply shock, such as an oil-price spike) raises the price level and cuts output, causing cost-push inflation and stagflation. A rightward shift (a beneficial supply shock) lowers the price level and raises output.
Long-run aggregate supply: classical and Keynesian views
LRAS shifts right with anything that raises productive capacity: more or better factors of production, investment, improved education and training, technological progress, and effective supply-side policy. This is potential growth.
Macroeconomic equilibrium
The effect of AD and AS shifts
- A rightward AD shift raises output and the price level (more so the closer to full capacity); a leftward shift lowers both.
- A rightward SRAS shift lowers the price level and raises output (a beneficial supply shock); a leftward shift raises the price level and cuts output (cost-push inflation, stagflation).
- A rightward LRAS shift raises potential output, allowing non-inflationary growth.
Examples in context
- The 2022 energy shock. Surging energy costs shifted SRAS left, causing stagflation: higher inflation alongside weaker growth.
- Falling commodity prices. A drop in oil prices is a beneficial supply shock, shifting SRAS right for lower inflation and higher output.
- Investment and net zero. Investment in new technology and infrastructure aims to shift LRAS right, raising potential output.
Try this
Q1. Explain why the SRAS curve shifts left after a rise in oil prices. [3 marks]
- Cue. Higher input costs reduce supply at every price level, shifting SRAS left (cost-push pressure).
Q2. Explain the difference between the classical and Keynesian views of LRAS. [4 marks]
- Cue. Classical: vertical at full capacity (AD affects only the price level long run); Keynesian: L-shaped, so AD can raise output when there is spare capacity.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR H460/02 20215 marksExplain, using an AD-AS diagram, the effect of a fall in oil prices on the macroeconomic equilibrium.Show worked answer →
A short structured question. State that oil is a key input cost, so a fall in oil prices reduces firms' costs of production.
Develop the chain on an AD-AS diagram: lower costs shift short-run aggregate supply (SRAS) to the right. At the new equilibrium the price level is lower and real output is higher, so the economy enjoys both lower inflation and faster growth (a beneficial supply shock). Employment tends to rise as output expands.
Markers reward identifying the rightward SRAS shift, the new equilibrium with lower price level and higher output, and a correctly labelled diagram (AD, SRAS, price level and real output).
OCR H460/02 202312 marksAssess the view that the shape of the long-run aggregate supply curve determines whether a rise in aggregate demand causes inflation or growth.Show worked answer →
A levels-of-response question. Knowledge and application: explain the classical (vertical) LRAS, where the economy always returns to full-capacity output, so a rise in AD only raises the price level in the long run. Contrast the Keynesian LRAS (an L-shape), where there can be spare capacity, so a rise in AD raises real output without inflation until near full capacity.
Analysis: develop both cases with AD-AS diagrams.
Evaluation: the effect of higher AD depends on where the economy is operating. With spare capacity (a negative output gap), AD raises output (growth); near or at full capacity, it mainly raises the price level (inflation). Conclude that the shape and the starting position together determine the outcome, so the statement is broadly right but the output gap matters as much as the curve's shape.
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Sources & how we know this
- OCR A Level Economics (H460) Specification — OCR (2023)