Long-run AS

Question 1

Classical LRAS

Answer 1

The Classical view is that LRAS is inelastic. This has important implications. The classical view suggests that real GDP is determined by supply-side factors – the level of investment, the level of capital and the productivity of labour etc. Classical economists suggest that in the long-term, an increase in aggregate demand (faster than growth in LRAS), will just cause inflation and will not increase real GDP.

Question 2

Competition policy

Answer 2

Any policy which seeks to promote competition & efficiency in markets and industries.

Question 3

Demographic change

Answer 3

Any change in the population, for example in terms of average age, dependency ratios, life expectancy, family structures, birth rates etc.

Question 4

Innovation

Answer 4

The commercial development of exploiting new or improved goods and services.

Question 5

Invention

Answer 5

The creation of a new product, service or concept.

Question 6

Keynesian economics

Answer 6

The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to fund public works projects like new roads, housing, schools and hospitals.

Question 7

Keynesian LRAS

Answer 7

The Keynesian LRAS assumes wages and prices are fixed until near full employment is reached. Whilst the economy has spare capacity, the LRAS is perfectly elastic, and only when near full employment is reached, does the price level start to rise. At full employment, the Keynesian LRAS becomes vertical as no further output can be produced.

Question 8

Keynesian unemployment

Answer 8

Unemployment caused by a lack of aggregate demand in the economy – a deficiency of private sector spending causes both output and employment to contract.

Question 9

Long-run AS (LRAS)

Answer 9

Long run aggregate supply is determined by the state of technology, productivity, factor mobility and incentives. The LRAS curve is assumed to be vertical (i.e. independent of prices) and represents the normal capacity level of output for the economy.

Question 10

Migration

Answer 10

The movement of people, especially workers, between countries.

Question 11

Immigration

Answer 11

refers to people entering a country.

Question 12

Emmigration

Answer 12

refers to people leaving a country.

Question 13

Net migration

Answer 13

refers to the difference between the number of people entering and leaving a country.

Question 14

Productivity

Answer 14

A measure of efficiency = output per unit of input or output per person employed.