Theme 2: Aggregate Demand Flashcards
Difference between Long Run and Short Run Aggregate Supply
SRAS is the period of time when at least one FOP is fixed whereas LRAS is when all FOP are variable.
What shape is the neoclassical LRAS model?
vertical
What are the axis for LR diagrams
Price level and real GDP
Explain the Keynesian LRAS curve
The price level in the economy is fixed until resources are fully employed. When resources are not fully employed there is spare capacity in the economy.
According to Keynesian theory what happens to price level when output increases in a fully employed economy.
Price level will increase and therefore output changes are inflationary.
According to Keynesian theory what happens to price level when output increases when there is spare capacity?
Output can be increased without effecting the price level or increasing inflation.
6 factors influencing long-run AS?
- Technological advances,
- Changes in relative productivity,
- Changes in education and skills,
- Changes in government regulation,
- Demographic changes and migration,
- Competition policy.
Why do technological advances influence the long run AS?
If more money is spent on improving tech then the economy can produce goods in larger volumes or improve quality.
Why do changes in relative productivity influence the long run AS?
A more productive labour and capital input will produce a larger quantity of output with the same quantity of input.
Why do changes in education and skills influence the long run AS?
This improves the quality of human capital so it is more productive or more highly skilled.
Why do changes in government regulations influence the long run AS?
Government can limit how productive and efficient a firm can be.
Why do demographic changes and migration influence the long run AS?
If inward migration occurs of working age people then the labour force will increase.
Why does competition policy influence the long run AS?
A more competitive market encourages firms to be more efficient.
