2.3.3 Long run aggregate supply (LRAS)

Define LRAS

• LRAS represents the maximum possible output (it is like a PPF).

• It represents the maximum output when all factors of production are fully and efficiently employed

What does the classical long run aggregate supply curve look like?

YP is the estimated potential national output in the long run

What does an outwards shift in LRAS imply?

An outward shift in LRAS signifies:

• an increase in potential output and employment 

• real economic growth

(an increase or improvement in factors of production

What is something important to notes about the classical LRAS curve?

There is no change in real output because the economy is working at its maximum already and is perfectly elastic - no more can be outputted

What is the Keynesian Aggregate Supply Curve?

It is non-linear where the elasticity of aggregate supply is dependent in part on the level of spare productive capacity at different stages of nation’s economic cycle.

What is productive capacity?

How much the economy can produce

What is spare capacity?

How much below full capacity the economy is working at

What does the Keynesian aggregate supply curve look like?