4.2.2.6 - LRAS

Question 1

What is LRAS

Answer 1

The total supply when all factors of production are variable

Question 2

What is the classical view of LRAS

Answer 2

• suggests the economy will always produce the maximum that its factors of production will allow
• they believe markets will always function efficiently over the long run, so the economy will produce the outer boundary of its PPF
• wages and prices are flexible so will adjust to bring the economy to its new equilibrium
• meaning there is no unemployment in the long run

Question 3

What does keysian believe about LRAS

Answer 3

• it is possible for the economy to be in equilibrium below full employment
• markets can take time to clear and therefore long periods of unemployment are possible: the market can run at full capacity, with limited spare capacity, and with unused capacity

Question 4

What causes LRAS to shift out

Answer 4

Changes in the quantity or quality of factors of production

Question 5

List some reasons that could lad to a shift in LRAS

Answer 5

• technological advancements
• changes in education or skills
• change in the institutional structure of the economy
• changes in gov regulation and policy
• demographic changes and migration

Question 6

How does technological advancements lead to a shift out of LRAS

Answer 6

• reduces the cost of production for firms as technology ca provide a more productive workforce
• there is an increase in supply as firms can produce more output so receive higher profit
• other firms may be encourages to enter the industry, leading to a more productive workforce overall

Question 7

How does changes in education and skills lead to a shift out of LRAS

Answer 7

• an increase in the quality of education will improve the quality of the labour force
• meaning that they are more productive as there is a rise in efficiency and skill level
• firms will be able to produce more output so will be reviewing higher profits

Question 8

How do changes in the institutional structure of the economy lead to a shift out of LRAS

Answer 8

• the role of the banking sector can influence LRAS such as changes in monetary policies

Question 9

How does Changes in governments regulations policy lead to a shift out of LRAS

Answer 9

• governments will often use regulatory frameworks to improve the level of consumption in a market
• if successful, the greater competition can drive efficiency gains amongst firms as they strive to maximise their profits
• this could encourage innovation which increases the productivity of their firm

Question 10

How do demographic changes and migration lead to a shift out of LRAS

Answer 10

• changes in population impacts LRAS
• if the population is aging, less people will be in work so LRAS will shift in
• however if skilled workers migrate into the UK the quality of the labour force will increase, improving productivity