2.3.3

Question 1

What is the LRAS?

Answer 1

Long run aggregate supply (LRAS) represents the maximum possible output; it is similar to PPF.
It represents that maximum output when all factors of production are fully and efficiently employed.
But limit to how much firms can increase their supply - run into capacity constraints

Question 2

Main factors causing a shift in LRAS

Answer 2

The main factors causing a shift in LRAS are a change in the total quantity and quality of an economy’s factors of production

Question 3

How are the maximum output level and general price level linked in LRAS?

Answer 3

This maximum output level is independent of the price level.

Question 4

An outward shift of LRAS signifies:

Answer 4

An increase in potential output and employment and signifies real growth

Question 5

In the long run, what is the ability of an economy to produce goods and services to meet demand based on

Answer 5

The state of current technology and the availability and quality of factor inputs

Question 6

What does productivity measure and how can it be measured?

Answer 6

• Productivity measures the efficiency of the production process.
  o Output per worker employed.
  o Output per person hour.
  o Value added from each extra factor input employed.

Question 7

Significance of increased productivity

Answer 7

Countries with strong labour productivity growth tend to benefit from high rates of growth and low inflation. But productivity affects other macroeconomic objectives

Question 8

How does increased productivity affect inflation?

Answer 8

Lower – unit costs falling, outward shift of aggregate supply if productivity is rising faster than wages

Question 9

How does increased productivity affect economic growth (real GDP)

Answer 9

Higher – gains in aggregate supply, expansion of AD

Question 10

How does increases productivity affect unemployment?

Answer 10

Lower in long run as real GDP growth rises

Question 11

how does increased productivity affect business investment?

Answer 11

Higher – business profits will have increased – giving them more resources to fund capital spending

Question 12

Economic Benefits of Net Inward Migration

Answer 12

1. Migrants provide fresh skills = higher productivity.
2. Migrants increase size of active labour supply – expanding country’s LRAS
3. often a driver of innovation
4. Positive multiplier effects (tax+ reinvest)
5. Tax revenues: Legal immigrants in work pay taxes and are likely to be net contributors to government finances.

Question 13

what are the main aims of competition policy?

Answer 13

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

Question 14

what do technological advances do to the country’s LRAS?

Answer 14

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

Question 15

automation will __ productivity but ___ job loss/insecurity

Answer 15

increase

increase

Question 16

Possible advantages of automation:

Answer 16

1. Improved product quality – fewer mistakes will be made, and precision may be improved
2. Shorter working weeks for labour
3. Rising productivity
4. Safer working conditions
5. Lower operating costs for businesses 24/7 + no off days

Question 17

Possible disadvantages of automation:

Answer 17

1. Job loss for some workers, if their work is easily replicated by machines
2. Initial large capital expenditure by businesses – make it difficult for smaller firms to compete
3. Possibility of reduced flexibility, if businesses are using specialist machinery
4. Possible risk of hacking

Question 18

define Human capital

Answer 18

The skills, experience, aptitudes and attitudes of human input into the production process

Question 19

brain drain definition

Answer 19

highly skilled workers might decide to emigrate to other countries where they can receive higher pay, however may end back remittances

Question 20

Why can’t we exceed maximum production potential like we do in the short run?

Answer 20

• allowing factors to work overtime, etc is not sustainable as workers will eventually take a break and machines will eventually stop working

Question 21

What do classical economists base their theory of a vertical LRAS curve on?

Answer 21

Based on the classical view that markers tend to correct themselves quickly, markets will return to equilibrium at some point

Question 22

When did Keynes disagree with the classical LRAS curve?

Answer 22

• After the Great Depression in the 1930s

- he said if market is in disequilibrium for 20-30 years, a vertical curve can’t be correct

Question 23

Why did Keynes believe wages were sticky downwards?

Answer 23

Believed they wouldn’t fall below a given point because:

• unions able to prevent wages falling too low
• business unwilling to risk démotivation of staff
• workers only working at a min given wage

Question 24

Explain the Keynesian LRAS curve in relation to employment and price levels

Answer 24

• when there is high unemployment (horizontal line) and firms willing to recruit - they don’t have to offer high wages (perfectly elastic LRAS)
• between A and B, as employment rises - scarcity of labour - firms offer higher wages to attract best workers = higher price level
• output becomes more price inelastic until it reaches B, where increase in prices does not affect output as PPF has been reached

Question 25

Factors affecting the LRAS curve

Ie. What factors influence output

Answer 25

• technological advances
• changes in relative productivity
• changes in education and skills
• changes in government regulations (r&d,working age, lower corporate tax)
• demographic changes - migration
• competition polices