10.6

• What shape is the LRAS curve in the classical model?

  Vertical at the full employment level of output
• why is the shape of LRAS vertical and what does it show?

  showing that in the long run, output is determined by supply-side factors, not the price level
• normal capacity level of output definition

  the level of output at which the full production potential of the economy is being used
• what shape is the LRAS curve in the Keynesian model?

  • flat when spare capacity exists
  • upward sloping as resources become scarce
  • vertical when full employment is reached
• how does investment influence LRAS?

  • increases capital stock and technology
  • improves productive capacity -> shifts LRAS right
• how does education and training influence LRAS?

  • improves workforce skills and productivity
  • shifts LRAS right by increasing human capital
• how does labour market flexibility influence LRAS?

  • flexible wages, mobility of labour, and reduced regulation can improve efficiency
  • shifts LRAS right
• how does technological progress influence LRAS?

  • enhances productivity of capital and labour
  • Creates new industries and production methods
  • Shifts LRAS right
• how do government regulations and supply-side policies affect LRAS?

  • deregulation and pro-competition policies boost efficiency -> LRAS right
  • excessive regulation or high taxes may discourage production -> LRAS left
• How does migration influence LRAS?

  • inward migration can increase labour supply and skill base -> LRAS right
  • Outward migration of skilled workers can reduce capacity -> LRAS left
• how do natural resources affect LRAS?

  • discovery of new resources or better utilisation increases potential output
  • depletion of resources reduces LRAS
• what is the role of infrastructure in LRAS?

  • better transport, energy, and digital infrastructure reduce costs and raise efficiency
  • improves connectivity and output -> shifts LRAS right
• how do demographic changes affect LRAS?

  • an aging population may reduce labour supply - LRAS left
  • a growing, youthful population expands workforce -> LRAS right
• how do supply-side shocks affect LRAS?

  • positive shocks (e.g new technology) -> LRAS right
  • negative shocks (e.g natural disasters, pandemics) -> LRAS left
• why is LRAS important for economic growth policy?

  • determines the economy’s long-term growth potential
  • guides government supply-side policies to achieve sustainable growth
• What is the Keynesian AS curve?

  A model of aggregate supply showing different elasticities of supply at different levels of output, with three distinct regions: flat, upward-sloping, and vertical
• why is the Keynesian AS curve flat at low levels of output?

  because of spare capacity (unused labour, idle factories). firms can increase output without raising costs or prices
• what does the upward-sloping section of the Keynesian AS curve represent?

  as resources become scarcer, costs rise. firms must raise prices to expand output, creating cost-push inflation
• why does the Keynesian AS curve become vertical at high levels of output?

  when the economy reaches full employment, all resources are fully used. output cannot increase further, regardless of demand
• how does an increase in AD affect the economy when it is on the flat part of the Keynesian AS curve?

  raises output and employment significantly, with little to no inflation
• how does an increase in AD affect the economy of the vertical part of the Keynesian AS curve?

  causes pure inflation, since output cannot rise further
• why do Keynesians argue against austerity in recessions?

  Because with space capacity (flat AS section), government spending boosts output and employment without inflationary pressure
• how does supply-side policies affect the Keynesian AS curve?

  successful polices (investment, education, technology) shift the whole curve right, allowing more output at every price level
• how is the Keynesian AS curve different from the classical LRAS curve?

  • Keynesian: elastic at low output, vertical at full at full employment
  • classical: always vertical at full employment (no spare capacity assumption)
• why is the Keynesian AS curve important in modern macroeconomic policy?

  it highlights that the impact of demand-side policies depends on the level of space capacity in the economy
• What does a rightward movement of the LRAS curve illustrate?

  Long-term economic growth