Reference no: EM132293406

Question :

What is short term aggregate supply and how does it differ from long term aggregate supply? Also, what can an economy do that desires to increase long term aggregate supply?

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ARIE:

Short term aggregate supply refers on the way to the overall invention of goods and services by an economy at different prices yet the resources needed to produce them are the same. When prices increase, the quantity of supply also increases. In the short term, the amount slopes up because the cost of at least one factor is constant.

Short term supply is always linked to inflation and unemployment. Higher inflation leads to high prices which in turn increases the output. Higher rises are also linked to low rates of unemployment in an economy.

While long term aggregate supply refers to the relationship that exists among the cost of production and output in the long run. It varies from short term aggregate supply in the sense that the cost of production or resources is not assumed to be constant.

This relationship reflects the belief by economists that the changes in demand only have a temporary effect on the output of the economy. When production factors such as labor are changed or shifted, it is likely to affect the quantity of production (Khan, 2012)

To increase long term aggregate supply, the economy should introduce policies that increase production and increase long term supply. The economy can do so by lowering unemployment rates. When most people are employed, there will be enough supply of labor and the production will be high.

Secondly, the economy should encourage privatization to ensure steady supply from both private and public firms. A long term aggregate supply can also be increased by minimizing regulation and reducing taxes to encourage investors to venture into production to ensure adequate and maximum amount that meets the demand in the market.