4.2.2.2 - AS/AD analysis

Question 1

What do classical economists believe when creating their LRAS

Answer 1

• the market will always operate at full employment
• wages and prices will automatically adjust to bring the economy back to equilibrium
• any over/under use of resources will be temporary

Question 2

How do classical economists believe you can achieve growth without inflation

Answer 2

The LRAS curve must shift out

Question 3

What is Keynes theory

Answer 3

Argues that rapid adjustments of wages to correct the equilibrium don’t actually happen
- instead the economy is able to settle at equilibrium below full employment

Question 4

How do Keynesian economists believe inflation can be lowered

Answer 4

When LRAS shifts out, inflation can be lowered whilst achieve it full employment also

Question 5

What are supply/ demand shocks

Answer 5

Sudden unexpected events that affect the economy, usually the growth rate
Demand shocks: affects the [position of AD and the level of spending
Supply shocks: affects the position of AS and the level of output
-> all changes occur rapidly