LRAS Flashcards
What is LRAS
The maximum possible output when all FOP are fully and efficiently employed
Independent to Price Level
What are the main factor causing a shift in LRAS
Quality + Quantity of an economy’s FOP
What does an outward shift in LRAS show
Increase in potential output and employment
Real economic growth
What factors affect LRAS
Competition Policy
Technological Advances
Education and Skills
Government Regulations
Factor Mobility
Demographic Changes and Migration
Enterprise and Risk Taking
Economic Incentives
Shape of LRAS curve in classical economics
Vertical
What is associated with long run equilibrium price
SRAS
Passes through the point LRAS = AD
What affects the impact of changes in AD and AS in the long run
Shape of the LRAS Curve
When does long run equilibrium occur
Where LRAS intersects with the AD curve
What can never occur in the long run according to classical economists
Unemployment
Shape of LRAS curve in Keynesian economics
Mirror curved L
When is the economy at full employment in Keynesian economics in the long run and what about equilibrium
When the curve is vertical
However equilibrium can be at less than full employment
Key point of disagreement between classical and Keynesian economics in the long run
The extent to which workers react to unemployment by accepting real wage cuts
Rise in AD in the classical model in the long run
Rise in price level but no change in real output
No amount of extra demand will raise LR equilibrium output - LRAS curve shows max productive capacity of the economy at that point in time
Under what assumptions is the SRAS curve drawn on in the LR in classical economics
Assumption that wage rates and other costs remain constant
Conclusion of rise in AD in LR classical model
Increase prices and output
Over time prices rise but output falls - economy returns to LR equilibrium
No effect on equilibrium output in the long run only changes in price level
Increase in AD is purely inflationary
