2.3.3 - Long - Run AS

Question 1

What Is The LRAS Influenced By?

Answer 1

A change in the productive potential of the economy.

Question 2

What Does The Classical LRAS Look Like?

Answer 2

Question 3

Why Is LRAS Vertical In The Classical Model?
(2 Points)

Answer 3

~ Represents one level of output the economy will always produce at in the LR, this level of output is known as YFE.

~ Classical economists believe that there is only one level of output and we will always be at YFE in the LR.

~ When the economy is at the natural rate of unemployment, we are at the YFE.

~ When we are at YFE, economists agree that we are fully employing all FOPs.

Question 4

What Is YFE?
(3 Points)

Answer 4

~ Is the full employment level of output.

~ Represents the maximum level of output an economy can produce using all FOPs at sustainable levels.

~ It is possible to get beyond YFE, if using FOPs unsustainably.

Question 5

What Does The Keynesian LRAS Look Like?

Answer 5

Question 6

Why Is The LRAS Like A Reversed L In The Keynesian View?
(3 Points)

Answer 6

~ They dispute the idea of there being a SRAS and a LRAS.

~ Shaped like this due to them believing that there is a level of spare capacity in the economy.

~ The closer we get to YFE the more pressure put on existing FOPs.

Question 7

What Causes Shifts In The LRAS?
(7 Points)

Answer 7

~ Q2 CELL and an improvement in the productive efficiency of the economy.

Examples Of This Are:
~ Improvements in labour productivity.

~ Increased investment.

~ Improvements in infrastructure.

~ Increased quantity of labour.

~ Competition.

~ New resource discoveries.

Question 8

Describe ‘Improvements In Labour Productivity’ As A Factor Influencing LRAS
(2 Points)

Answer 8

~ Q2 of labour rises -> increasing the productive potential of the economy -> shifting LRAS right.

~ Q2 of labour decreases -> decreasing productive potential of the economy -> shifting LRAS left.

Question 9

Describe ‘Increased Investment’ As A Factor Influencing LRAS
(3 Points)

Answer 9

~ E.g. Technology advances, R+D and new factory development.

~ Increases in investment -> improves the productive potential of the economy -> shifting LRAS right.

~ Decreases in investment -> decreases the productive potential of the economy -> shifting LRAS left.

Question 10

Describe ‘Improvements In Infrastructure’ As A Factor Influencing LRAS
(3 Points)

Answer 10

~ Reduces LR costs for firms.

~ Improvements -> improves productive potential of the economy -> shifting LRAS right.

~ No improvements -> decreases productive potential of the economy -> shifting LRAS left.

Question 11

Describe ‘Increased Quantity Of Labour’ As A Factor Influencing LRAS
(3 Points)

Answer 11

~ Immigration and incentives (Reducing welfare benefits and cutting income taxes).

~ Increased size of the labour force -> improves productive potential of the economy -> shifting LRAS right.

~ Decreased size of the labour force -> decreases productive potential of the economy -> shifting LRAS left.

Question 12

Describe ‘Competition’ As A Factor Influencing LRAS
(3 Points)

Answer 12

~ Increased levels of competition means firms try to reduce costs, to stay competitive.

~ Increased competition -> improves productive potential of the economy -> shifting LRAS right.

~ Decreased competition -> decreases productive potential of the economy -> shifting LRAS left.

Question 13

Describe ‘New Resource Discoveries’ As A Factor Influencing LRAS
(2 Points)

Answer 13

~ New discoveries -> improves productive potential of the economy -> shifting LRAS right.

~ No discoveries -> keeps productive potential of the economy the same.