Determinants of LRAS

• What is the shape of the Long-Run Aggregate Supply (LRAS) curve?

  Vertical

  
• What does a vertical LRAS curve suggest about output in the long run?

  Output is fixed at each level with full employment of factors of production

  
• What happens to national output when aggregate demand changes from AD1 to AD2?

  National output (real GDP) remains unchanged, but the price level increases
• What does the position of the vertical LRAS curve represent?

  The normal capacity level of output of the economy

  
• What factors influence the Long-Run Aggregate Supply (LRAS)?

  • Changes in quantity or quality of factors of production
  • Technological advances
  • Changes in relative productivity
  • Changes in education and skills
  • Changes in government regulations
  • Demographic changes and migration
  • Competition policy
• How do technological advances affect the LRAS curve?


  They allow the economy to produce goods in larger volumes or improve quality
• What is the impact of changes in relative productivity on output?

  More productive labor and capital produce a larger quantity of output with the same input
• How do changes in education and skills influence the LRAS curve?

  They improve the quality of human capital, making it more productive
• What effect do excessive government regulations have on productivity?

  They can limit how productive and efficient a firm can be
• How do demographic changes and migration affect the labor force?

  Net inward migration increases the size of the labor force
• What is the role of competition policy in the economy?

  It encourages firms to be more efficient and productive
• What does the Keynesian AS curve suggest about the price level when resources are not fully employed?

  The price level is fixed until resources are fully employed
• What does the horizontal section of the Keynesian AS curve represent?

  Output and price level when resources are not fully employed
• What happens to output when there is spare capacity in the economy?

  Output can be increased without affecting the price level
• What occurs when resources are fully employed and aggregate demand increases?

  It leads to inflation as the price level increases
• What is the effect of an increase in aggregate demand from AD3 to AD4 when resources are fully employed?

  It causes the price level to increase from P2 to P3