2.3.3 - Long - Run AS Flashcards
What Is The LRAS Influenced By?
A change in the productive potential of the economy.
What Does The Classical View Believe About The LRAS?
Perfectly inelastic at the point of full employment of all available resources.
What Does The Vertical LRAS Represent In The Classical View?
It represents the maximum possible output on a production possibilities frontier.
According To The Classical View, What Happens To The Economy In The Long Run?
The economy will always return to the full employment level of output.
When Do Short-Run Output Gaps Occur?
When the economy deviates from full employment due to fluctuations in economic activity.
What Is An Inflationary Gap?
Develops during periods of extreme economic growth when output exceeds the full employment level.
How Does The Economy Self-Correct From An Inflationary Gap In The Long Run?
The economy returns to the full employment level of output, but at a higher average price level.
What Is A Recessionary Gap?
Develops during economic slowdowns or recessions when output is below the full employment level.
How Does The Economy Self-Correct From A Recessionary Gap In The Long Run?
The economy returns to the full employment level of output, but at a lower average price level.
What Does The Classical LRAS Look Like?
How Did Keynes View The Shape Of The LRAS Curve?
L-shaped, with supply elastic at lower output levels and perfectly inelastic at full employment (YFE).
Why Is Supply Elastic At Lower Levels Of Output According to Keynes?
There is lots of spare production capacity, allowing struggling firms to increase output without raising prices.
What Happens To Supply At The Full Employment Level (YFE)?
Supply becomes perfectly inelastic, and price inflation occurs as firms compete for scarce resources.
What Does The Keynesian View Say About The Economy’s Ability To Self-Correct?
(2 Points)
~ The economy will not always self-correct to full employment (YFE) and can remain stuck at a lower equilibrium.
~ Has been seen in events such as the Great Depression.
What Role Does The Government Play In Keynesian Economics?
The government should increase expenditure to shift aggregate demand and improve negative animal spirits in the economy.
What Does The Keynesian LRAS Look Like?
