2.3.3 - long-run AS

Question 1

What does long-run mean?

Answer 1

The prices of all FOPs may change

Question 2

What does the classical LRAS curve look like?

Answer 2

A vertical line from the x axis

Question 3

Why is the classical LRAS curve vertical?

Answer 3

Classical economists assume prices adjust to establish a market clearing equilibrium, so all FOPs are fully employed and the economy will be operating at full capacity.

Question 4

What impacts the LRAS?

Answer 4

Quality and quantity of FOPs

Question 5

What are some examples of factors that would affect the LRAS?

Answer 5

• technological advances
• human capital (skills and education)
• labour market participation
• net migration
• natural resources
• competition policy
• changes in relative productivity
• government regulation changes

Question 6

What do Keynesian economists believe about LRAS?

Answer 6

They don’t believe that prices adjust in the long run to bring about full employment.

Question 7

What is the first section of the Keynesian LRAS curve?

Answer 7

AS begins perfectly elastic (horizontal) at low levels of output due to significant levels of spare capacity.

Question 8

What is the second section of the Keynesian LRAS curve?

Answer 8

As the economy verges toward full employment, AS becomes more inelastic, due to shortages of capital. Cost of production increases and prices rise to maintain profit margins.

Question 9

What is the third section of the Keynesian LRAS curve?

Answer 9

Full employment is reached and AS is perfectly inelastic. There is no spare capacity and optimal productivity is reached.