10.6 - determinants of long-run aggregate supply

Question 1

What is the normal capacity level of output?

Answer 1

the level of output at which the full production potential of the economy is being used

Question 2

What is the LRAS?

Answer 2

the long run aggregate supply, shows the normal capacity of the economy, reflects the production potential of the economy

Question 3

What determines the state of the LRAS?

Answer 3

• state of technical progress
• quantities of capital/labour (factors)
• mobility of factors
• productivity of factors (labour)
• people’s attitudes to hard work
• personal enterprise, risk-taking
• economic incentives
• institutional structure of economy; law and financial, banking…

Question 4

Why is contract law important?

Answer 4

if they aren’t legally enforceable normal economic activity will break down which causes LRAS –> left

Question 5

How can an economy operate beyond ‘normal capacity’?

Answer 5

a factor of SRAS is level of money wages in the economy, higher level of wages shifts it leftwards; workers can work overtime and any and all capital will be used.
this cannot be sustained and the economy will shrink slightly when getting back to normal

Question 6

What does the Keynesian LRAS curve look like?

Answer 6

looks like an inverted ‘L-shape’ because a depressed economy can settle into under-full-employment equilibrium. Some believe that this cannot be fixed without government intervention.