2.3.3 Long Run AS

Question 1

What is long run AS? What is it compared to and why?

Answer 1

Total output an economy can produce when operating at full output.
PPF curve - show potential max output.

Question 2

How is a long run as curve influenced? (Shifted)

Answer 2

By a change in productive capacity (quantity or quality of factors of production).

Question 3

What are the two long run AS curves?

Answer 3

Classical and Keynesian.

Question 4

Draw a Classical LRAS graph?

Answer 4

Y axis = average PL
X axis = R GDP
Draw vertical LRAS curve

Question 5

Are wages fixed in the LR?

Answer 5

No - no factors are fixed.

Question 6

What does classical long run believe about markets? Eg? - when there are disequilibriums

Answer 6

That they will correct themselves naturally (which shown by the classical LRAS graph is at full production).
EG. Recession gaps (will correct and return to long run levels of output but at lower average prices - as prices just need to adjust).
Inflationary gaps (will correct and return to long run levels but at higher average prices).

Question 7

What does classical long run believe about employment?

Answer 7

That it will be full - accepts short run it wont be.

Question 8

Is it possible to exceed the max potential without shifting the curve?

Answer 8

No, only short run can exceed max potential (as factors of production can only do this temporarily before stopping).