Question

LRAS stands for:

1)Why does this curve have no slope? What is the message of this curve being straight vertical?

a)Any equilibrium beyond (to the right of) LRAS does what to the unemployment rate? Why?

b)Any equilibrium beyond (to the right of) LRAS does what to the inflation rate? Why?

2)Scientists discuss new sources of clean energy. A big discovery in this field would shift LRAS in which direction?

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

Answer 1

LRAS stands for long run aggregate supply curve.

a) This curve doesn't have any message because it stands at the potential level of output. That cannot be changed with price but it is affected by the real values like population, labor availability, capital and technology.

Any equilibrium point on the right mean that the output in the economy is overheat and the output is more than the potential level in the economy. The unemployment rate will be low.

b) Here, the inflation are will be higher as the economy has already utilitzed all the resources and is producing beyond the potential output.

c) Scientist developing will be a positive shock for the economy and that will shift the LRAS curve to the right and the new potential level of output in the economy will be at a higher level.

d) It will be negative shock or the economy and it will decrease the resources and labor availability. It will shift it to the lef.t