LRAS

Question 1

Name the 2 theories for LRAS

Answer 1

Classical
Keynesian

Question 2

Summarise Classical LRAS,what does it take into account

Answer 2

-This theory suggests that supply is perfectly inelastic
-The long run economy is operating at full capacity of its resources (labour and production capacity)
-there is no unemployment
-wages are flexible

Question 3

What does the LRAS curve show

Answer 3

-the relationship between a country’s POTENTIAL output and genreal price level

Question 4

Why is the LRAS curve vertical

Answer 4

Because supply is perfectly ineleastic and everything is operating at full capacity

Question 5

What two factors cause shift in the LRAS curve

Answer 5

Quantity of resources
Quality of resources

Question 6

How can we increase the quantity and quality of resources

Answer 6

Increase quantity:
-inward migration-employing workers from other countries
-increase retirement age
-push the economically inacitve to work

Increase quality:
-improve training
-longer education within business
-improvements in technology (machinery)

Question 7

Dsecribe the shape/stages of a keynesian LRAS curve

Answer 7

First stage:spare capacity
-shape is perfectly elastic
-excess productive capacity left due to low AD
-mass unemployment
-easy to increase output due to high amounts of resources available

Second stage:bottleneck
-shape is slightly diagonal
-productive capacity is decreasing as resources are beginning to be used up
-increase in AD

Third stage:Full Capacity
-shape is perfectly inelastic
-economy is operating at full employment level
-no spare capacity,all resources are being used up

Question 8

In the long run,all factors of production are …
Fill in the blank

Answer 8

Variable (can change)