The long-run aggregate supply (LRAS) curve is vertical at the full-employment level of output. This means...

 

   

Transcribed Image Text:

The long-run aggregate supply (LRAS) curve is vertical at the full-employment level of output. This means that LRAS doesn't change as the price level changes. The location of the LRAS depends on the productive capacity of the economy. Developing more/better resources or improving technology will shift the LRAS curve outward. The LRAS curve represents a point on an economy's production possibilities curve (PPC). Remember that the PPC represents the maximum output that can be produced given scarce resources. The economy grows if the PPC shifts outward because of more/better resources or technological advances. For the same reason, the LRAS curve shifts outward with more better resources or if there are technological advances. Aggregate output in the economy can actually be greater than LRAS in the short run. This means that resources are being used more intensively. For example, workers can work double hours in the short run. However, they can't continue to work that number of hours in the long run. Eventually, the equilibrium level of output will always return to the full-employment level. Aggregate output can only increase in the long run if the LRAS has increased. Student Alert: Make sure you don't confuse real gross domestic product (GDP) changes in the short run due to business cycles with long-run economic growth! Aggregate Supply and Production Possibilities Curves PPC Graph PRICE LEVEL LRAS and SRAS Curves LRAS Y* REAL GDP SRAS CAPITAL GOODS •G CONSUMER GOODS 1. What does a PPC show? What are the assumptions about resources and technology in the PPC model? 2. List two things that could happen to allow the economy to produce at Point A. 3. On the previous graphs, Y*, Y1, and Y2 in the aggregate supply graph correspond to which points on the PPC graph? Explain. i. Y* →Point ii. Yl-Point iii. Y2 Point 4. List two things that could happen to allow the economy to produce Y2 output. 5. How can the economy produce at Y2 in the short run? If it is producing at Y2 in the short run, what will happen in the long run? Explain. The long-run aggregate supply (LRAS) curve is vertical at the full-employment level of output. This means that LRAS doesn't change as the price level changes. The location of the LRAS depends on the productive capacity of the economy. Developing more/better resources or improving technology will shift the LRAS curve outward. The LRAS curve represents a point on an economy's production possibilities curve (PPC). Remember that the PPC represents the maximum output that can be produced given scarce resources. The economy grows if the PPC shifts outward because of more/better resources or technological advances. For the same reason, the LRAS curve shifts outward with more better resources or if there are technological advances. Aggregate output in the economy can actually be greater than LRAS in the short run. This means that resources are being used more intensively. For example, workers can work double hours in the short run. However, they can't continue to work that number of hours in the long run. Eventually, the equilibrium level of output will always return to the full-employment level. Aggregate output can only increase in the long run if the LRAS has increased. Student Alert: Make sure you don't confuse real gross domestic product (GDP) changes in the short run due to business cycles with long-run economic growth! Aggregate Supply and Production Possibilities Curves PPC Graph PRICE LEVEL LRAS and SRAS Curves LRAS Y* REAL GDP SRAS CAPITAL GOODS •G CONSUMER GOODS 1. What does a PPC show? What are the assumptions about resources and technology in the PPC model? 2. List two things that could happen to allow the economy to produce at Point A. 3. On the previous graphs, Y*, Y1, and Y2 in the aggregate supply graph correspond to which points on the PPC graph? Explain. i. Y* →Point ii. Yl-Point iii. Y2 Point 4. List two things that could happen to allow the economy to produce Y2 output. 5. How can the economy produce at Y2 in the short run? If it is producing at Y2 in the short run, what will happen in the long run? Explain.

Answer rating: 100% (QA)

1 What does a PPC show What are the assumptions about resources and technology in the PPC model A Production Possibilities Curve PPC shows the maximum ... View the full answer