Macro 5 Flashcards

1
Q

What is LRAS (long-run aggregate supply)

A

LRAS shows the full capacity of the economy if all factors were being utilised

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2
Q

How can LRAS illustrate unemployment

A

The level of unemployment can be demonstrated if not all factors are being utilised

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3
Q

When does the LRAS curve shift outwards

A

When the quality or quantity of the factors of production increases. This means that the capacity of the economy increases.

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4
Q

When does average wage rates shift the AS curve

A

In the short run

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5
Q

When does a change in the quality or quantity of factors of production shift the AS curve

A

In the long run

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6
Q

What is the shape of the classical LRAS curve

A

A vertical line

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7
Q

What is the key difference between SRAS and LRAS in the classical model

A

LRAS is vertical because output will be optimised in the long run and not affected by changes in price

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8
Q

When demand increases, what happens to output and price level in the economy according to the classical model

A

Output remains the same, but the price level increases.

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9
Q

According to the classical model, when there is a shift in AD why does the economy always return to full employment

A

Workers revise their wage expectations. When AD increases, unemployment is low so workers are in demand so workers revise up their wage expectations. Vice versa

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10
Q

What is the shape of Keynesian LRAS curve

A

A horizontal line which gradually increases in gradient to form a vertical line

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11
Q

What major economic event did Keynes witness which led him to question the classical model

A

Great depression which highlighted that the classical model was incorrect as output was low and unemployment remained high.

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12
Q
A
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