LRAS Curve

Definition

The LRAS (Long-Run Aggregate Supply) curve represents the relationship between the price level and the quantity of output supplied in the long run. It depicts the maximum level of real GDP that an economy can produce at full employment, given the existing technology, capital stock, and labor force.

5 Must Know Facts For Your Next Test

1. The LRAS curve is vertical, indicating that output is determined by the economy's productive capacity and is independent of the price level in the long run.
2. The position of the LRAS curve is determined by factors such as the size and quality of the labor force, the capital stock, technology, and the efficiency of resource allocation.
3. Shifts in the LRAS curve can be caused by changes in the factors of production, such as an increase in the labor force or improvements in technology.
4. The LRAS curve is important in understanding the long-run effects of changes in aggregate demand on the price level and real GDP.
5. The LRAS curve is a key component of the AD-AS model, which is used to analyze the determination of the price level and real GDP in both the short and long run.

Review Questions

• Explain how the LRAS curve relates to the economy's productive capacity and full employment.
  • The LRAS curve represents the maximum level of real GDP that an economy can produce at full employment, given the existing technology, capital stock, and labor force. The vertical nature of the LRAS curve indicates that output is determined by the economy's productive capacity and is independent of the price level in the long run. This means that the economy can only produce at its potential GDP level when all resources are fully employed, and any changes in aggregate demand will not affect the long-run level of output.
• Describe the factors that can shift the LRAS curve and how these shifts impact the economy.
  • The position of the LRAS curve is determined by factors such as the size and quality of the labor force, the capital stock, technology, and the efficiency of resource allocation. Increases in these factors can shift the LRAS curve to the right, indicating a higher potential GDP and a higher level of output that can be produced at full employment. Conversely, decreases in these factors can shift the LRAS curve to the left, reducing the economy's productive capacity. These shifts in the LRAS curve have important implications for the long-run effects of changes in aggregate demand on the price level and real GDP.
• Analyze the role of the LRAS curve within the AD-AS model and its significance in understanding the long-run equilibrium of the economy.
  • The LRAS curve is a crucial component of the AD-AS model, as it represents the long-run relationship between the price level and the quantity of output supplied. By incorporating the LRAS curve into the AD-AS framework, economists can analyze the long-run effects of changes in aggregate demand on the price level and real GDP. The vertical LRAS curve indicates that in the long run, output is determined by the economy's productive capacity, and any changes in aggregate demand will only affect the price level, not the level of real GDP. This understanding of the long-run equilibrium is essential for policymakers to design effective macroeconomic policies that promote sustainable economic growth and stability.

Related terms

Aggregate Supply:

The total quantity of goods and services that firms are willing to sell at different price levels in an economy.

Potential GDP:

The level of real GDP that an economy can produce when all resources are fully employed.

Full Employment:

A situation where everyone who wants a job has one, and the economy is operating at its productive capacity.