Question

LRAS stands for:

1.Scientist also discuss bird and swine influenza outbreaks. Such an outbreak (dear GOD forbid) would shift LRAS in which direction?

a)Aggregate supply slopes from the _ corner of the graph upward toward the _ corner meaning a greater output of GDP requires prices to _.

b)Teachers are tenured (which means a teacher must be brought to court to be fired). If every worker in America were tenured after a year on the job (as was the case in Portugal) then aggregate supply would shift _

c)My credit card company often offers me checking accounts and my bank often offers me investments. Such are examples of deregulation. Deregulation shifts the aggregate supply curve?

2)Aggregate demand slopes from northwest down to the southeast as does a regular demand curve. A regular demand curve has this negative slope because of the substitution effect meaning that discounted items replace others. However why can’t the substitution effect be used to justify aggregate demand?

3)Regular demand also slopes down because of the income effect, which means a discount is the same as a pay raise. If prices decline in a country, is that not the same as a national pay raise?

Answer 1

LRAS stands for: Long-Run Aggregate Supply.

(1)

An influenza outbreak will increase death rate which will decrease labor supply. As a result, potential output in the economy will fall due to lower availability of labor (a factor of production), which will shift LRAS curve to left.

(a) Aggregate supply slopes from the upper-left corner of the graph upward toward the lower-right corner meaning a greater output of GDP requires prices to decrease.

(b) If every worker is tenured, cost of hiring (and firing) increases for employers (firms), which increases the cost of business and firms reduce hiring, thus production falls. Short run aggregate supply curve would shift to left.

(c) Deregulation does not shift aggregate supply curve unless it decreases the cost of business and/or increases profitability of firms so that they increase production and output. However, deregulation will shift aggregate demand since it increases investment and/or money supply.

NOTE: As per Answering Policy, 1st question is answered.