Th2.3: Classical LRAS curve

Question 1

In the long run, what is AS independent of?

Answer 1

the price level

Question 2

In the long run, what is AS determined by?

Answer 2

the level of all factors of production and the quality of technology

Question 3

What is LRAS a measure of?

Answer 3

a country’s potential output and the concept is linked to the idea of a PPF - it shows the productive potential of the economy - shows the FULL CAPACITY OUTPUT

Question 4

What does full capacity output mean?

Answer 4

where all resources are being fully utilised, and this can be linked to output gaps between the GDP trend line and the actual GDP

Question 5

How is it possible for an economy to exceed the maximum potential LRAS in the short run?

Answer 5

by allowing factors of production to work overtime or not allow time for maintenance of machinery

Question 6

Why is it possible for an economy to exceed the maximum potential LRAS in the long run?

Answer 6

machines will eventually stop and workers will want a break

Question 7

What is the vertical AS curve based on?

Answer 7

the classical view that markets tend to correct themselves fairly quickly