Th2.3: Keynesian LRAS curve

Question 1

What view did Keynes express?

Answer 1

that if the economy can be in disequilibrium for 20-30 years, it can’t be correct to imply the AS curve is vertical

Question 2

Refer to PP

Look at Graph 1. What is point B?

Answer 2

the maximum potential output with current resources and technology, so it is the PPF - vertical as with the classic view

Question 3

What do wages tend to be? What does this mean?

Answer 3

‘sticky downwards’ - they will not fall below a certain level

Question 4

What are the five reasons that wages will not fall below a certain level?

Answer 4

unions prevent wages falling too low
businesses unwilling to risk demotivation
workers unwilling unless certain wage is offered
full employment one area, unemployment another - lack of mobility
minimum wage means wages cannot fall below a certain level

Question 5

Refer to PP

Look at Graph 1. Where is high unemployment on this graph?

Answer 5

anywhere under point A

Question 6

When there is high unemployment and firms want to recruit…

Answer 6

they do not have to offer higher wages to attract staff as the LRAS is perfectly elastic at this point (below A)

Question 7

Refer to PP

Look at Graph 1. At the point between A and B, as employment rises…

Answer 7

there are less people looking for jobs and labour is becoming scarce enough that firms have to offer higher wages to attract the best workers - these higher wages leading to a higher average price level

Question 8

Refer to PP

Look at Graph 1. Before reaching point B….

Answer 8

output becomes more price inelastic, until it reaches point B where an increase in prices no longer affects output as the PPF has been reached

Question 9

Refer to PP

Look at Graph 1. Before reaching point B….

Answer 9

output becomes more price inelastic, until it reaches point B where an increase in prices no longer affects output as the PPF has been reached