Question

1) Briefly explain how and why we want the economy potential national income, Yp to be consistent with each of the short-run Aggregated supply, SRAS and the long-run Aggregate supply,LRAS

2) Briefly explain why economic growth is only illustrated by the long-run aggregate supply, LRAS curve

can you please explain this

Answer 1

1) Potential GDP or National Income ( Yp ) is the total output that can be produced when every production resource is being utilized at their normal rate of utilization . Yp shows the maximum potential of an economy that can be achieved given the set of resources . Hence the LRAS is vertical , because Yp is constant or inelastic ( unless there is any change in amount of resources available ) . SoYp should be consistent with each of the short-run Aggregated supply, SRAS and the long-run Aggregate supply,LRAS . It cannot be changing in short run continuously because an economy's potential cannot keep on changing .

2) LRAS is inelastic or vertical because it shows the potential real GDP or National Income of an economy . Economic growth refers to growth in the potential of an economy by infrastuctural development , technological progess , migration of skilled labor etc . Economic growth will always lead to rise in potential of an economy or what an economy can produce given the set of resources . Or economic growth may also lead to rise in set of resources available . Hence it is always shown by rightward shift of LRAS .