Long-run aggregate supply

Question 1

What does the long-run mean?

Answer 1

the ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availability and quality of factor inputs

Question 2

What does an outward shift of LRAS signify?

Answer 2

An increase in long-run potential output and employment

Question 3

What factors affect LRAS?

Answer 3

Factors of production:
-Land
-Additional land or new raw materials productive
potential will improve and LRAS will increase
-Labour
-Increase in size of labour force–output will increase
-Increase in quality of labour–efficiency & productivity
is enhanced and LRAS will increase
-Capital
-An increase in quantity, quality and productivity of
capital will boost LRAS
-Entrepreneurship
-Improved incentives to set up a business or invest in
development of new goods and services will boost
LRAS
-Government Intervention
-Regulatory frameworks to improve the level of
competition in different markets

Question 4

What is productivity?

Answer 4

Measures the efficiency of the production process

Question 5

What is the impact of a rise in LRAS?

Answer 5

Expansion along the AD curve. price level will decrease as available factor resources are increased and scarcity reduces. Real national output will increase and maximum productive potential will also. LRAS will shift to right

Question 6

What is the impact of a fall in LRAS?

Answer 6

A country’s potential national output can decline:

• Damaging effects of natural disasters
• Destruction/ loss of factor inputs caused by civil war etc
• Large scale net outward labour migration
• A trend decline in productivity perhaps caused by a persistent recession which causes net capital investment to be negative