2.2.3 Long Run of Aggregated Supply

Question 1

What is long-run aggregate supply

Answer 1

the ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availability and quality of factor inputs.

Question 2

What is LRAS independent of

Therefore an outward shift in the LRAS curve would be due to

Answer 2

This is independent of the price level in the economy.

An outwards shift of the LRAS curve represents an increase in potential GDP / potential output / potential employment.

Question 3

Changes in national potential GDP/LRAS are due to 6 things, being?

Answer 3

1. labour supply and producutivity (i.e. more people joining the labour force including migration, and their levels of education and training )
2. stock of capital inputs – affected by the level of gross capital investment
3. efficiency of inputs e.g. shifting resources from rural to urban areas
4. quality of factor inputs/productivity of inputs
5. Advances in technology
6. Improvements in institutions e.g. banking system
7. Governance and regulations
8. Competion policiy

Question 4

The Neoclassical view of LRAS is

Answer 4

perfectly inelastic LRAS curve

Question 5

How would a classical view of LRAS be shown a graph

And hence, how would an expansion in LRAS be shown

Answer 5

Rightward shift represents an increase in the economy’s productive potential/capacity

Question 6

Using two separate AS curves is an approach taken by, what type of economists

Answer 6

Neoclassical economists

Question 7

How can u show LRAS and SRAS on a graph together as two separate lines

What would cause a shift in SARS and LRAS

Answer 7

SARA if costs of production change

LRAS quantity and/or quality of factors of production change

Question 8

What does productivity measure

Answer 8

the efficiency of the production process

Question 9

In the long run, productivity is a major determiner of what

Answer 9

economic growth and/or inflation

Question 10

What can productivity be measured by

Answer 10

• Output per worker employed
• Output per person hour
• Value added for each extra factor of production

Question 11

What do you add together to work out national output

Answer 11

Factor inputs (land, labour, capital)

+

Factor productivity

Question 12

What does increased productivity do to inflation

Answer 12

Lower inflation

Lower unit costs, outward (expansion) of short-run aggregate supply, if productivity rises faster than wages

Question 13

What does increase productivity do to economic growth (real GDP)

Answer 13

Increase economic growth (GDP)

gains in AS and expansion of aggregate demand

Question 14

What does increase productivity do to unemployment

Answer 14

Lower unemployment in long run

as real GDP growth rises

Question 15

What does increased productivity do to balance of trade

Answer 15

Improve balance of trade

More competitive exports (being an injection)

Question 16

What will increased productivity do to spare capacity

Answer 16

Rise in extra capacity in short-run

We can get more from exiting factors of production

Question 17

What can increased productivity do to business investment

Answer 17

Higher business investment

Increased business profits

Factor that increases the propensity to invest

Question 18

What will increased productivity do to Gov fiscal balance

Answer 18

Help Gov to reduce state spending

Increase value for money

Question 19

What can Migration do to LRAS

Answer 19

depend on human capital of migrant workers and how long they stay

Expect positive net inward migration to shift LRAS outward (expansion)

Question 20

What are the main aims of a competition policy

Answer 20

to promote competition between firms (which should bring prices down for consumers and encourage innovation) and improve the efficiency of markets

Question 21

How can Technology effect LRAS

Answer 21

technology usually provides more capital, but it can also make existing factors of production more efficient or stimulate the growth of brand-new industries.

Throughout history, there have been many significant technological advances that ultimately affected long-
run growth rates

Question 22

What are concerns over automation

Answer 22

Increasing use of robots and machines to replace humans will certainly increase productivity, but there have been worries about job loss, especially amongst low-skilled workers

Question 23

How can education affect LRAS

What can be a problem with this

Answer 23

A highly trained / highly skilled labour force should increase an economy’s LRAS because each worker is capable of producing more output; higher human capital raises productive capacity.

In some developing countries, however,
highly skilled workers might decide to emigrate to other countries where they can receive higher pay – this is known as a ‘brain drain’.

Question 24

What are keynesian aggregate supply curves are dependent on

Answer 24

on part the amount of spare productive capacity at different stage of the economic cycle

The Aggregate supply curves becomes inelastic as a countries reaches capacity limits

Question 25

When spare capacity is high, Aggregate supply will be

Answer 25

elastic

Output can be increased without a significant change in general price level - no inflation

When AD₁ rises to AD₁

Question 26

Why when the elasticity of the AS curve falls, output decreases

Answer 26

• The amount of spare capacity declines
• Possibility of diminishing return in production
• Resources shortage as economy approaches full employment
• Shift from AD₃ to AD₄ and Y₄ is full capacity of the economy

Question 27

When AS is perfectly inelastic (LRAS) the economy’s capacity is what

How is the only other way to increase LRAS at this point

Answer 27

at full capacity

therefore increase in AD is purely inflationary in short run, with little increase in output

If the AS curve will shift to the right

Question 28

What is non-inflationary growth, and how would it be shown on a combined AS curve

Answer 28

A shift from AD₁ to AD₁, where there is no increase in the general price level

Question 29

How would a shift be shown on the combinded LRAS curve

Answer 29

Increase in output without an increase in the general price level (inflation)