Keynsian LRAS

Question 1

What do Keynesians believe

Answer 1

• LRAS can be upwardly sloping and elastic
• economy can be below full employment level, even in the long run
• for example in recession there is excess saving leading to decline in AD

Question 2

What was the Keynesian input on employment equilibrium

Answer 2

Keynesians also believe wages and prices can be sticky and therefore economies don’t automatically return to full employment equilibrium

Question 3

Define employment equilibrium

Answer 3

An economy is adequately using all its input resources such as capital, land etc

Question 4

What are sticky wages

Answer 4

sticky wages are when workers’ earnings don’t adjust quickly to changes in labor market conditions

Question 5

refer to page 147 CGP on keynesian LRAS

Answer 5

page 147

Question 6

What does it mean if the LRAS curve stays vertical?

Answer 6

• if the curve was vertical this would mean that
  wages and prices fall when unemployment exists.
  -This fall in wages thus makes it worthwhile employing people and so employment increases and the economy returns to full employment.

Question 7

Why does Keynes think that the LRAS curve cannot stay vertical?

Answer 7

• if the curve was vertical this would mean that
  wages and prices fall when unemployment exists.
  BUT KEYNES SAID
• They will not fall below a certain level because:
  o unions are able to prevent wages falling too low
  o businesses are unwilling to risk demotivation of their staff by offering low
  wages
  o workers are unwilling to work unless a certain wage is offered
  o there may be full employment in one area and unemployment in another area
  due to lack of labour mobility
  o the minimum wage means wages cannot fall below a certain level.

Question 8

Describe keynesian LRAS

Answer 8

When there is high unemployment (the horizontal line on the graph- anything below point A) and a firm wants to recruit, they do not have to offer high wages to attract
staff as the LRAS is perfectly elastic at this point.

At the point between A and B (curving upwards, as
employment rises, there are less people looking for jobs and labour is becoming scarce enough that firms have to offer higher wages to attract the best workers.
These higher wages lead to a higher average price level.

Output becomes more price
inelastic until it reaches point B, where an increase in prices no longer affects output
as the PPF has been reached