Question

The Council of Economic Advisers requests that you carefully describe and explain at least two long run macro policy options that the President can consider to boost productivity growth and potential GDP. These policies should shift the Long Run Aggregate Supply curve (LRAS) out over time. Please note that fiscal and monetary policies are not long run policies. Discuss which perspective was more useful in developing your two policy options: the Keynesian Perspective or the Neoclassical Perspective? Utilize the AD/AS framework in framing your answer.

Answer 1

Macroeconomics takes an overall view of the economy, which means that it needs to juggle many different concepts including the three macroeconomic goals of growth, low inflation, and low unemployment; the elements of aggregate demand; aggregate supply; and a wide array of economic events and policy decisions.

We can examine both long-term and short-term changes in gross domestic product, or GDP, using the AD/AS model. In an AD/AS diagram, long-run economic growth due to productivity increases over time is represented by a gradual rightward shift of aggregate supply

Two macro-economic policies that have the potential to boost economic growth are:

• Investment in physical and human capital, technology
• Policies to bridge the unemployment gap

There are two different types of unemployment using an AD/AS diagram—cyclical unemployment and the natural rate of unemployment. Cyclical unemployment bounces up and down according to the short-run movements of GDP. The long-term, baseline level of unemployment that occurs year in and year out, however, is called the natural rate of unemployment.

This is based on the Keynesian model that depends on the total spending in the economy and its effects on output and inflation