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Long Run Aggregate Supply Curve

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Understanding the Long-Run Aggregate Supply Curve (LRAS)



The economy's overall output capacity isn't static; it grows and shrinks over time. Understanding this dynamic is crucial for policymakers and businesses alike. This article explains the Long-Run Aggregate Supply (LRAS) curve, a fundamental concept in macroeconomics that represents the economy's potential output when all factors of production are fully utilized. Unlike the short-run aggregate supply (SRAS), the LRAS isn't affected by temporary price changes. Instead, it shifts based on long-term changes in the economy's productive capacity.


1. What is the LRAS Curve?



The LRAS curve is a vertical line on a graph showing the relationship between the overall price level and the quantity of output supplied. Its vertical nature signifies that the potential output of an economy is independent of the price level in the long run. This is because, in the long run, wages, prices, and expectations adjust fully to any changes in the overall price level. No matter how high or low prices are, the economy's potential output remains the same. This potential output is determined by factors that influence the economy's productive capacity, not by price fluctuations.

Imagine a farmer with a fixed amount of land, equipment, and labor. Regardless of the price of wheat, the farmer can only produce a certain amount within a given period. The LRAS curve represents this limitation at the economy-wide level.


2. Factors that Shift the LRAS Curve



Unlike the short-run aggregate supply curve, which shifts due to changes in input costs or productivity, the LRAS curve shifts only when there are changes in the economy's long-term productive capacity. These changes stem from:

Changes in the quantity or quality of resources: An increase in the labor force (e.g., through immigration or increased participation rate), an increase in capital stock (e.g., through investment in new factories and equipment), or technological advancements (e.g., automation, improved farming techniques) all shift the LRAS to the right, representing increased potential output. Conversely, a decrease in these factors shifts the LRAS to the left.

Technological advancements: Technological progress is a major driver of economic growth. Innovations in production methods lead to increased efficiency and productivity, ultimately boosting potential output. For example, the invention of the assembly line revolutionized manufacturing, dramatically increasing output.

Improvements in human capital: Investing in education and training enhances the skills and knowledge of the workforce, leading to increased productivity and a rightward shift of the LRAS.


3. The LRAS and Economic Growth



The LRAS curve is a key indicator of economic growth. A rightward shift of the curve indicates an expansion of the economy's productive capacity, signifying economic growth. Sustained economic growth is largely dependent on consistent shifts to the right of the LRAS curve. Conversely, a leftward shift implies a contraction in productive capacity, potentially leading to lower living standards.

For example, a country investing heavily in infrastructure development (roads, ports, communication networks) will experience an outward shift of its LRAS curve, allowing for increased production and economic growth.


4. LRAS vs. SRAS: Key Differences



It's crucial to distinguish between the LRAS and the SRAS curves. The SRAS curve depicts the relationship between the price level and output in the short run, where prices and wages are sticky. A change in aggregate demand affects output and price level in the short run, causing movements along the SRAS curve. However, in the long run, wages and prices adjust, bringing the economy back to its potential output (the LRAS). Thus, changes in aggregate demand only affect the price level in the long run, not the output level, as the economy returns to the LRAS.


Actionable Takeaways



Understanding the LRAS curve is crucial for making informed decisions about economic policies. Policies aiming to increase long-term economic growth should focus on shifting the LRAS curve to the right. This includes investments in education, infrastructure, technology, and research and development. Ignoring the LRAS and focusing solely on short-term economic stimulation might lead to unsustainable booms and busts.


FAQs



1. What happens if the economy operates beyond its LRAS? In the short-run, it's possible, but unsustainable. It will lead to inflation as demand outstrips supply and eventually resources will become strained, forcing the economy back to its potential output.

2. Can the LRAS curve ever shift left? Yes, factors like natural disasters, wars, or significant decreases in the labor force can cause a leftward shift, reducing the economy's potential output.

3. How is the LRAS curve different from the production possibilities frontier (PPF)? While both represent an economy's productive capacity, the PPF typically focuses on two goods, whereas the LRAS considers the overall output of the economy.

4. Is the LRAS curve perfectly vertical in reality? While the theoretical LRAS is perfectly vertical, in reality, it might have a slight slope reflecting some degree of flexibility in resource utilization.

5. How can policymakers use the LRAS to guide their decisions? By understanding the factors that shift the LRAS, policymakers can implement policies that promote long-term economic growth and improve living standards. This might involve investments in infrastructure, education, and technological innovation.

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Answered: long-run aggregate supply curve - bartleby Using the AD-AS model, if consumers and business become more optimistic about the future direction of the economy and increase spending, then: a-long-run aggregate supply will decrease. b-aggregate demand will decrease. c-aggregate demand will increase. d-long-run aggregate supply will increase.

Which of the following is vertical? a. neither the long-run Phillips ... 1. Aggregate demand, aggregate supply, and the Phillips curve In the year 2027, aggregate demand and aggregate supply in the imaginary country of Patagonia are represented by the curves AD27 and AS on the following graph.

Answered: Assume the economy is in long-run… | bartleby 4.1 Why does the short-run aggregate supply curve slope upward? 4.2 Explain why the long-run aggregate supply curve is vertical. Then, (verbally and graphically) explain how each of the following events would affect the long-run aggregate supply curve. a. A lower price levels b. A decrease in the labor force c.

Answered: The following graph shows a hypothetical aggregate … The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the economy in January 2025.

Answered: 1. Assume that a country’s economy is… | bartleby 22. When the aggregate demand curve and the short-run aggregate supply curve intersect, A) the long-run aggregate supply curve must also intersect at the same point. B) inflation must be increasing. C) structural and frictional unemployment equal zero. D) the economy is in short-run macroeconomic equilibrium. 23.

Assume the Federal Reserve triples the growth rate of the … Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the stock market boom. 240 AS 200 AD 160 AS 120 80 AD 40 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the short run, the increase in consumption spending associated with the stock market expansion causes the price level to the price level …

Answered: 7. The long-run aggregate supply curve and short-run ... The long-run aggregate supply curve and short-run adjustments The following graph shows an economy's short-run aggregate supply curve (SRAS), current equilibrium aggregate price level (P1), and real GDP ( Q1). The economy currently has Natural Real GDP (QN) of $8 trillion.

Short-Run vs. Long-Run Aggregate Supply Curves - 644 Words The long-run equilibrium of the economy is found where the aggregate-demand curve crosses the long-run aggregate-supply curve (point A). When the economy reaches this long-run equilibrium, the expected price level will have adjusted to equal the actual price level. As a result, the short-run aggregate-supply curve crosses this point as well.

Answered: If the economy is in long-run equilibrium, a ... - bartleby The following graph shows the aggregate demand curve (AD), the short-run aggregate supply curve (AS), and the long-run aggregate supply curve ( LRAS) for a hypothetical economy. Initially, the expected price level equals the actual price level, and the economy experiences long-run equilibrium at a natural level of output of $100 billion..

Answered: Assume that a country's economy is in short-run The long-run aggregate supply curve reflects the amount of potential production when we are in full employment.Answer: True False 2. Long-term macroeconomic equilibrium occurs when short-term aggregate supply intercepts aggregate demand and long-term aggregate supply at the same point.Answer: True False 3.