Neo Classical
Keynesian
Shifts in LRAS
100
TRUE OR FALSE.. Within the new classical perspective long run equilibrium will always be restored? Explain why!
True
100
What is the first stage of the Keynesian LRAS?
The aggregate supply curve is perfectly inelastic at low levels of economic activity. Producers in the economy can raise their levels of output without incurring higher average costs because of the existence of “Spare Capacity” Spare capacity is high levels of unused factors such as unemployed labour and under utilized capital. Should there be a need for greater output these can be used to their fullest capacity at constant average cost.
100
Draw an increase in LRAS either K or NC
Diagram
200
Explain 3 factors that may increase LRAS of an economy employing the new classical approach.
Training Technological advances Research and Development
200
What is Stage 2 of the Keynesian LRAS?
As the economy is approaching its potential output (Y1) and the spare capacity is used up - the economies available factors of production become increasingly scarce. As firms try to increase output they will have to bid for the increasingly scarce factors. High prices for the factors of production mean higher costs for the producers, and the APL will rise to compensate for the high costs.
200
LRAS curve will shift to the right if there is an ______________ of the FOPS
IMPROVEMENT IN QUALITY
300
What is it called if equilibrium real output is below the potential level of output ?
Deflationary Gap
300
What is the 3rd stage of the Keynesian LRAS?
When the economy reaches its full capacity, it is impossible to increase output any further because all FOP are fully employed. This is when the LRAS is fully inelastic. This third stage fully corresponds to the LRAS of the New classical curve. At this stage output cannot be increased without an increase in quantity or improvement in the quality of the factors of production
300
what are the factors that increase the quality and quantity of Labour + Entrepreneurship ?
-Education -Training -Re-training -Increase in Birth Rate -Immigration -Decrease in the natural rate of unemployment
400
Draw the New classical LRAS with a inflationary Gap
Draw the New classical LRAS with a inflationary Gap
400
Explain the role of Bottlenecks in the production process while explaining the rising section of the Keynesian curve
There are restrictions and if firms are above YF it will be harder to get resources
400
If there is an increase in -Research and Development -Technological advancements that contribute to efficient capital What factor of production is it?
CAPITAL
500
What does the New Classical LRAS Believe? In general.
Believe that there should be very minimum of Government intervention in the allocation of resources in the economy.
500
Draw the deflationary gap and the inflationary gap in the Keynesian LRAS
Diagram
500
-Increase in Birth Rate -Immigration -Decrease in the natural rate of unemployment What factor of production?
L + E
M
e
n
u