Aggregate Supply Flashcards
What does the classical model of aggregate supply suggest?
Their are two graphs:
Short run AS
Long run AS
What does the classical short run AS curve look like?
Upward sloping (diagonal and up, left to right)
What is SRAS determined by?
Cost of production in the economy
What does the classical LRAS graph look like?
Completely vertical = perfectly elastic
What does the classical LRAS graph look like and why?
Represent 1 level of output that the economy will always produce in the long run as variations will always only be temporary
How might the aggregate supply be higher than LRAS?
Only in the SHORT RUN when factors of production are used unsustainably
What causes a shift in LRAS?
Quantity/Quality of factors of production
Improvement in productive efficiency of an economy
What does the Keynesian model look like?
Only has LRAS
Horizontal line which BECOMES vertical
What are the similarities between the Keynesian and classical model of LRAS?
They agree that LRAS shift is caused by the same factors
Why does the Keynesian model differ to the classical model?
In the Keynesian mode, the economy can be producing less than the maximum output in the long run - due to spare capacity
Why might an economy not be producing at max capacity in the Long Run (Keynesian model)?
They might have lots of spare capacity and the lower the spare capacity gets, the closer the economy is to maximum capacity (shown by moving from the horizontal to the vertical part of the graph)
What is short run macro equilibrium?
When the economy is producing higher or lower than the LRAS in the short run
(SRAS = AD /= LRAS)
What is long run macro equilibrium?
When the economy is producing at maximum capacity
AD = SRAS = LRAS
What is a deflationary gap?
When the economy isn’t producing at full capacity (LRAS) in the short run
(Difference between where SRAS = AD and LRAS)
What is an inflationary gap?
When the economy is producing higher than the LRAS in the short run
(Difference between where SRAS = AD and LRAS)
