2.3.3: Long Run AS

Question 1

How is LRAS influenced?

Answer 1

• It is influenced by a change in the productive capacity of the economy.

Question 2

What is the classical view with supply?

Answer 2

• That supply is perfectly inelastic (vertical) at a point of full employment of all available resources
• In the long run, an economy will always return to this full employment level of output

Question 3

What is the Keynesian view on LRAS?

Answer 3

• that supply is elastic at lower levels of output as there is a lot of spare production capacity in the economy
• an economy will not always self correct and return to full employment level of output

Question 4

What is the classical view on output gaps

Answer 4

• in the short run, there may be output gaps in the economy

Question 5

What is the classical view when there is extreme periods of economic growth?

Answer 5

• there can be an inflationary gap
• in the long run this will self-correct and return to the long- run level of output, but at a higher average price level

Question 6

What is the classical view where there is a slowdown or a recession?

Answer 6

• there can be a recessionary gap
• in the long run this will self-correct and return to the long- run level of output, but at a lower average price level

Question 7

What are some factors influencing LRAS?

Answer 7

• Tech advances
• Changes in relative productivity
• Changes in education and skills
• Changes in government regulations
  -Demographic changes and migration
• Competition policy

Question 8

How do technological advances affect/ shift LRAS?

Answer 8

• improves the quality of all the factors of production
• shifts LRAS curve to the right, as more will be produced
• this is as more goods ca be produced with the same amount of resources

Question 9

How do changes in relative productivity affect LRAS?

Answer 9

• shifts LRAS to the right, as LRAS increases
• higher productivity means there will be higher production, meaning more goods will be supplied

Question 10

How do changes in education and skills affect LRAS?

Answer 10

• LRAS shifts to the right
• as a more skilled workforce will be more employable and work quicker and more efficiently, so output per worker will increase
• Education could also improve the occupational mobility of labour which decreases structural unemployment

Question 11

How do changes in government regulations affect LRAS?

Answer 11

• increases LRAS/ shifts LRAS to the right
  -gov regulations can improve the quantity of the factors of production

Question 12

How can demographic changes and migration affect LRAS?

Answer 12

-increases LRAS/ shifts to the right
- eg a positive net birth rate or positive net migration rate will increase the quantity of labour available

Question 13

How does competition policy affect LRAS?

Answer 13

• regulating industries so as to prevent monopoly power results in more firms supplying goods/ services in an economy and this increases the potential output of an economy