Macro 5 Flashcards
What is LRAS (long-run aggregate supply)
LRAS shows the full capacity of the economy if all factors were being utilised
How can LRAS illustrate unemployment
The level of unemployment can be demonstrated if not all factors are being utilised
When does the LRAS curve shift outwards
When the quality or quantity of the factors of production increases. This means that the capacity of the economy increases.
When does average wage rates shift the AS curve
In the short run
When does a change in the quality or quantity of factors of production shift the AS curve
In the long run
What is the shape of the classical LRAS curve
A vertical line
What is the key difference between SRAS and LRAS in the classical model
LRAS is vertical because output will be optimised in the long run and not affected by changes in price
When demand increases, what happens to output and price level in the economy according to the classical model
Output remains the same, but the price level increases.
According to the classical model, when there is a shift in AD why does the economy always return to full employment
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
What is the shape of Keynesian LRAS curve
A horizontal line which gradually increases in gradient to form a vertical line
What major economic event did Keynes witness which led him to question the classical model
Great depression which highlighted that the classical model was incorrect as output was low and unemployment remained high.
