classical model of LRAS

• What is the initial potential output of the economy referred to as?

  YFE
• At what point is the economy in equilibrium?

  AP1YFE
• How can a change in education level affect the economy?

  It can increase the quality of labour
• What happens to the LRAS when the quality of labour increases?

  It shifts to the right from LRAS1 to LRAS2
• What is the new level of possible output in the economy after the shift?

  YFE1
• What effect does the extra supply in the economy have on prices and output?

  Prices fall and output increases
• What is the new equilibrium after the changes in the economy?

  AP2YFE1
• What will change the long-run productive potential of the economy?

  Changes to any determinants of LRAS
• What are the effects of increasing education levels on the economy?

  • Increases quality of labour
  • Shifts LRAS to the right (LRAS1 to LRAS2)
  • Raises potential output (YFE to YFE1)
  • Leads to lower prices and higher output
• A diagram showing the Classical view of an increase in the long-run aggregate supply (LRAS) of an economy and how it lowers average price levels
• classical LRAS diagram