9. Keynesian V Neo- Approaches to AS Flashcards
What is the Neo-classical view of LRAS?
Neo-classical economists believe that the LRAS curve is perfectly inelastic at the full employment level of output.
They believe that the potential output of the economy is dependent on the quantity and quality of the factors of production and is independent of the price level.
What is the Keynesian view of LRAS?
Keynes believed that the long-run aggregate supply curve (LRAS) has three main segments through which a market will go through over a period of time.
The Keynesian AS curve assumes that prices and wages are fixed until full employment is reached. Over the ‘Keynesian range’ there is spare capacity in the economy, the price level is stable, and real output can expand as a result of increases in AD without any inflationary pressure.
What are the 3 levels of the Keynesian view?
(1) The market will start out with an increased level of output with no increase in prices since there is lots of spare capacity in the economy.
(2) The spare capacity will then be used up and output will go up at the same time. As a consequence, the costs of the factors of production will rise.
(3) Employment will be full since output cannot be increased since all the factors of production are being utilized
What is the long run supply curve?
The long-run aggregate supply curve is perfectly vertical, which reflects economists’ belief that the changes in aggregate demand only cause a temporary change in an economy’s total output and that prices will adjust to restore equilibrium.
The long-run aggregate supply curve can be shifted, when the factors of production change in quantity.
What are some of the causes of a fall in AS?
- Brain Drain
- Collapse in Business capital investment spending
- Higher production costs
- Major natural disaster/shock
What are possible Macro consequences of a fall in AS?
- May cause higher inflation
- May reduce real GDP/ national output
- Reduce total employment
- May increase BOP deficit.
