10.6 Determinants Of Long-run Aggregate Supply Flashcards
Diagram for an economy’s normal capacity level of output
Is LRAS influenced by the price level ?
No
Where is the LRAS curve located?
At the normal capacity level of output(level of output at which the full production potential of the economy is being used)
-max output an economy can provide when on the PPF
The position of the LRAS is determined by the same factors as what
The economy’s PPF
What factors determine the LRAS?(7)
-state of technical progress
-quantities of capital and labour and other factors of production in the economy
-mobility of factors of production particularly labour
-productivity of factors of production
-people enterprise, particularly among entrepreneurs (critical for movement to the right)
-existence of appropriate economic objectives
-institutional structure of the economy
Describe the institutional structure of the economy?
Factors such as the rule of law and efficiency of the banking system
Contract law is particularly important
If contracts are not legally enforceable normal economic activity can break down (shifts LRAS to the left)
Diagram for how the economy can temporarily produce a level of real output higher than the ‘normal capacity’ level of output
Describe this diagram
Diagram for the Keynesian inverted L-shaped LRAS curve?
What is the vertical LRAS curve sometimes called and why
The free market LRAS curve
Economy always operates at or close to normal capacity
-short run real output influenced by price level
-LRAS is determined by maximum normal production capacity
Both determine the LRAS curve
Why did Keynes argue in favour of an inverted L-shaped LRAS curve
A depressed economy can settle into an under-employment equilibrium (e,g point A)
Diagram for the differences between the traditional AS/AD model and the AD/AS analysis and the rate of inflation
