Keynesian LRAS:

• What happens to the long-run productive potential of the economy when determinants of LRAS change?

  It changes the long-run productive potential
• What is the initial potential output of the economy referred to as?

  YFE
• Where is the economy in equilibrium according to the study material?

  At the intersection of AD1 and LRAS
• What effect does a change in immigration policy have on LRAS?

  It can shift LRAS to the right
• What is the result of shifting LRAS from LRAS1 to LRAS2?

  Increased level of possible output YFE1
• What happens to output and average prices when AD is in the vertical portion of the LRAS curve?

  Output increases and average prices fall
• What is the equilibrium point if the economy starts at AD2Y2?

  It is stuck in a depression
• According to Keynesian thinking, what is required to change national output in a depression?

  AD needs to increase
• What are the effects of a rightward shift in LRAS on the economy?

  • Increased potential output (YFE1)
  • Output increases from YFE to YFE1
  • Average prices fall from AP1 to AP3
• How does the Classical model relate to changes in LRAS?

  • Changes in determinants affect LRAS
  • Long-run productive potential is altered
• What does LRAS stand for in economics?

  Long-Run Aggregate Supply
• How does an increase in LRAS affect output?

  It increases output without changing price levels
• What is the Keynesian view on the relationship between LRAS and average price levels?

  LRAS can increase without changing average price levels
• What is depicted in the diagram related to the Keynesian view of LRAS?

  • Increase in long-run aggregate supply (LRAS)
  • Change in output
  • No necessary change in average price levels
• keynesian approach Changes to LRAS