Change in LRAS

Definition

Change in Long-Run Aggregate Supply (LRAS) refers to a shift in the economy's potential output level, influenced by factors such as changes in resources, technology, and institutions. When LRAS shifts, it indicates a change in the economy’s capacity to produce goods and services over the long term, which can affect overall economic growth and employment levels. An increase in LRAS signifies growth, while a decrease suggests a contraction in potential output.

5 Must Know Facts For Your Next Test

1. A rightward shift in LRAS indicates an increase in potential output due to factors like technological advancements or an increase in the labor force.
2. Factors that can lead to a leftward shift in LRAS include natural disasters, depletion of resources, or unfavorable government policies.
3. Changes in LRAS are typically depicted graphically as vertical shifts on the aggregate supply curve, representing changes in productive capacity.
4. Long-term economic growth is reflected by sustained shifts to the right of the LRAS curve, which can be essential for improving living standards.
5. In the long run, shifts in LRAS can lead to changes in the natural rate of unemployment, as increased output can create more jobs.

Review Questions

• How does a change in LRAS affect the overall economy and its potential output?
  • A change in LRAS directly affects an economy's potential output by either increasing or decreasing its capacity to produce goods and services. An increase in LRAS reflects improvements such as technological advancements or increased labor supply, leading to higher potential output and economic growth. Conversely, a decrease suggests reduced capacity due to factors like resource depletion or adverse policies, which can negatively impact economic performance and employment levels.
• Evaluate the impact of supply-side policies on shifting the LRAS curve and their implications for economic growth.
  • Supply-side policies aim to enhance productivity and efficiency within the economy, potentially shifting the LRAS curve to the right. By implementing tax cuts, deregulation, and investing in education and infrastructure, these policies can foster an environment conducive to economic growth. As the LRAS shifts outward, it not only increases potential output but also creates job opportunities, thereby reducing unemployment and raising living standards.
• Analyze how external shocks can lead to shifts in LRAS and what this means for long-term economic stability.
  • External shocks such as natural disasters or geopolitical events can cause significant shifts in LRAS by disrupting production capabilities or altering resource availability. For instance, a major earthquake can destroy infrastructure and displace workers, leading to a leftward shift in LRAS and indicating reduced potential output. This instability affects long-term economic growth by creating uncertainty, impacting investment decisions, and potentially leading to higher unemployment rates. Understanding these dynamics is crucial for policymakers aiming to mitigate risks associated with such shocks.

Related terms

Potential Output: The maximum level of output an economy can sustain over the long term without leading to inflation.

Aggregate Demand: The total demand for goods and services within an economy at a given overall price level and in a given time period.

Supply-Side Policies:

Economic policies aimed at increasing productivity and shifting LRAS to the right through measures like tax cuts and deregulation.