Lesson 19 - LRAS Flashcards
What is a demand side shock?
Sudden fall in AD
Due to change in C,I,G,X-M
What is a supply side shock?
Sudden fall in AS
What is stagflation?
Inflation rate high/increasing
Growth slows
Unemployment rises/remains high
Describe the SRAS
Assumes level of capital is fixed
4 FoP can be increased (E.g., workers overtime)
Describe the LRAS
Capital can be increased
Curve determined by size of workforce, total capital, education + productivity
What does LRAS represent?
Output if all resources are employed
Estimated potential national output in the long run
What does an outward shift in LRAS show?
An increase in productive potential
What are the 3 ranges within the AS curve? (In order)
Keynesian
Intermediate
Classical
Describe the Classical Range
At full employment, GPL does not affect total output
AD shifts change GPL, not r.GDP
What do some economists believe about the Classical Range?
Economy will automatically adjust to this fixed level of output if prices + wages can adjust quickly enough
Describe the Intermediate Range
Trade off between higher output + prices
Must accept inflation to achieve growth
Prices increase as economy approaches full employment
Section that economy usually operates in
Describe the Keynesian Range
Lots of spare capacity
Possible to increase output + employment without increasing prices
Would occur during major recession with high unemployment
What should policies aim to do when spare capacity is high?
Increase AD
E.g., Prices down, IR up, employment up
What should policies aim to do when spare capacity is low?
Increase LRAS
E.g., Investment by firms, new technology etc.
Give 4 factors used to improve LRAS
Improve labour + capital productivity
Improve labour market participation (More paid workers)
Gains from innovation + enterprise
Capital investment (FDI, public sector, firm investment)
