2.3.3 Long run aggregate supply

What does the Long run AS curve represent?

Represents the relationship between total output firms are willing to produce and the price level, assuming all prices and wages are flexible.

What are the two main models of the long-run AS curve?

Keynesian and Classical perspectives.

What is the typical shape of the Keynesian LRAS curve?

A backward-L shape with three segments: horizontal, upward sloping, and vertical.

What does the horizontal segment of the Keynesian LRAS curve represent?

At low output and high unemployment, firms can increase production without raising prices.

What does the upward sloping segment indicate?

As full employment approaches, wage and price pressures rise, causing prices to increase as output increases.

What does the vertical segment of the Keynesian LRAS curve mean?

The economy is at full employment; output cannot increase further without causing inflation.

What key insight does the Keynesian LRAS model emphasize?

Existence of unemployment and idle capacity; output can grow without inflation until full employment.

According to Keynesian theory, how can government help the economy?

Fiscal policy can boost output and reduce unemployment without triggering inflation in the short run.

Real-world example of Keynesian LRAS?

The Great Depression—government spending increased output during high unemployment without causing inflation.

What is the shape of the Classical LRAS curve?

Vertical at full-employment output.

What does the Classical LRAS curve assume about prices and wages?

All prices and wages are fully flexible in the long run.

According to Classical theory, what determines output in the long run?

Technology, resources, and institutional factors—not the price level.

What economic principle is central to the Classical view?

Say’s Law — supply creates its own demand.

What does the Classical model say about government intervention?

It’s unnecessary and can be harmful; the economy self-adjusts to full employment

Real-world example supporting Classical LRAS?

Post-World War II economic expansions where economies quickly returned to full employment without major government intervention.

What does long-run aggregate supply (AS) reflect?

The total output an economy can produce when all resources are fully employed.

What shapes the potential output of an economy over time?

Several factors influence long-run AS.

What is the impact of technological improvements on long-run AS?

They increase productivity, allowing more output from the same input of labor and capital.

What is an example of technological advancement from history?

The Industrial Revolution, which introduced machinery that enhanced production processes.

What is a modern example of technological advancement?

Modern-day advancements in information technology, which have streamlined communication and data management, boosting productivity across sectors.

What is the impact of increases in productivity in one sector relative to others?

It can shift resources, optimizing the overall efficiency of the economy.

What is an example of a sectoral shift in advanced economies?

The shift from manufacturing to service-oriented industries, driven by higher productivity in technology and finance sectors.

What is an example of productivity improvements in developing countries?

Agricultural productivity improvements, freeing labor for industrial and service sectors.

What is the impact of a more educated and skilled workforce?

It can produce more output and adapt to new technologies, enhancing long-run AS.

What is an example of investment in education in Asia?

Investments in STEM education in South Korea, leading to a more innovative workforce.

What is an example of vocational training improving productivity?

Vocational training programs in Germany that equip workers with specialized skills.

What is the impact of government regulations on long-run AS?

Regulations can either constrain or enhance productivity.

What is the impact of deregulation?

Deregulation can lead to increased efficiency.

What is the impact of excessive regulation?

It can stifle innovation and growth.

What is an example of deregulation increasing efficiency?

Deregulation of the airline industry in the U.S. in the late 1970s.

What is an example of regulation increasing production costs?

Stringent environmental regulations in the European Union.

What is the impact of population growth, aging, and migration patterns?

They significantly affect the labor supply and thus long-run AS.

What is an example of demographic change reducing potential output?

Japan’s aging population leading to a shrinking workforce.

What is an example of migration boosting economic expansion?

Migration influxes in the U.S. and Germany contributing to a growing labor force.

What is the impact of policies that promote competition?

They can lead to more efficient markets and higher productivity.

What is an example of competition-promoting policy in the U.S.?

Antitrust laws that prevent monopolies and promote competitive markets.

What is an example of competition policy in the European Union?

Policies to reduce barriers to entry in various industries, fostering innovation and efficiency.