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 investment can be an important determinant of increasing the sustainable level of LRAS?

Answer 6

natural capital such as new mangrove forests and reforestation
renewable energy
infrastructure

Question 7

What does productivity measure and how can it be measured?

Answer 7

• 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 8

Significance of increased productivity

Answer 8

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

Question 9

How does increased productivity affect inflation?

Answer 9

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

Question 10

How does increased productivity affect economic growth (real GDP)

Answer 10

Higher – gains in aggregate supply, expansion of AD

Question 11

How does increases productivity affect unemployment?

Answer 11

Lower in long run as real GDP growth rises

Question 12

how does increased productivity affect business investment?

Answer 12

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

Question 13

Economic Benefits of Net Inward Migration

Answer 13

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 14

what are the main aims of competition policy?

Answer 14

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

Question 15

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

Answer 15

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

Question 16

Some recent advances in technology that might prove to impact on LRAS (according to MIT) include:

Answer 16

a. 3D printing (additive manufacturing)
b. Cloud based Artificial Intelligence
c. Blockchain technology
d. Quantum computing
e. Custom vaccines
f. Nuclear fission
g. Wearable technologie

Question 17

automation will __ productivity but ___ job loss/insecurity

Answer 17

increase

increase

Question 18

Possible advantages of automation:

Answer 18

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 19

Possible disadvantages of automation:

Answer 19

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 20

define Human capital

Answer 20

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

Question 21

brain drain definition

Answer 21

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

Question 22

break down concepts such as education into smaller, specific concepts, eg. primary, secondary, transferable, specific etc

Answer 22

thushyan dark yute

Question 23

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

Answer 23

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

Question 24

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

Answer 24

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

Question 25

When did Keynes disagree with the classical LRAS curve?

Answer 25

• 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 26

Why did Keynes believe wages were sticky downwards?

Answer 26

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 27

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

Answer 27

• 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 28

Factors affecting the LRAS curve

Ie. What factors influence output

Answer 28

• 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

Question 29

Microeconomic changes can…

Answer 29

Have macroeconomic impacts if widespread enough