4.2.2.C Long-Run Aggregate Supply (LRAS)

Long-Run Aggregate Supply

The total value of goods and services produced when the economy is producing at its productive potential.

LRAS can also be shown by PPF

Factors that Shift LRAS

= Factors that improve/worsen the Quantity, Quality, Efficiency (QQE) of the Factors of Production (CELL).

- Technical Progress

- Taxation

- Population Changes (e.g. immigration)

- Mobility of FoP

- External Shocks

- Education improving productivity of labour

Corporation Tax

A tax levied by the government on a business' profits

Institutional Factors

An organization founded for a religious, educational, professional or social purpose.

Examples of institutions: Financial institutions, legal system, property rights, good quality (non-corrupt) government

Why did Keynes argue the bottom of LRAS is horizontal?

- Economy could get 'stuck' at under-employment position (with NOG) due to deficient aggregate demand. This is due to 'sticky' wages (minimum wage) and 'sticky' prices. The market is not self-correcting.

Therefore the bottom of the curve is horizontal.

Fiscal Reflationary Policies

= To expand level of output in an economy using fiscal policies (tax&gov spending)

- Increasing government spending

- Lowering taxes

- Run a fiscal budget deficit (more gov spending than receiving)

Monetary Reflationary Policies

= To expand level of output in an economy using monetary policies (interest rates/money supply)

- Lowering interest rates

- Depreciating the exchange rate

- Quantitative Easing - increasing money supply