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65. Keynesian Long-run Aggregate Supply 1. Introduction 1.1 What does an economist mean by the long-run? _______________________________________________ The Keynesian LRAS allows economists to illustrate a number of different scenarios that might face an economy. On the following diagram draw Aggregate Demand curves to show the different situations listed. Also identify the corresponding level of output and price level for each situation. 1.2 An economy experiencing low levels of unemployment and some inflation – Real Output = ________ Price Level = _________ 1.3 An economy experiencing full employment – Real Output = _________ Price Level = __________ 1.4. An economy experiencing high levels of unemployment – Real Output = ________ Price Level = _______ 2. Analysis Based on the following extract, explain what is happening to the real output and price level using a fully labelled Aggregate Demand and Aggregate Supply curve. “The UK economy has officially been in recession for the last 6 quarters. This is one of the longest and deepest recessions the UK has suffered since World War II. Unemployment has continued to rise, reaching over 2.5 million using the ILO/LFS measure, but on the plus side inflation has been falling and is now well within the Bank of England target rate allowing the base rate to remain at historically low levels.” _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ 3. Analysis (2) Based on the following extract explain what is happening to the real output and price level using a fully labelled Aggregate Demand and Aggregate Supply curve. “The US economy is finally out of recession, reporting a steady increase in the level of consumption and investment, on the back of low interest rates and significant fiscal spending by the Government. However it is widely expected that the level of inflation will remain low despite the increase in the level of output and employment. ____________________________________________ ____________________________________________ ____________________________________________ ___________________________________________ www.a-zbusinesstraining.com 65. Answers: Keynesian Long-run Aggregate Supply What is meant by the Long-run? All factors of production are variable The Keynesian LRAS allows economists to illustrate a number of different scenarios that might face an economy. On the following diagram draw Aggregate Demand curves to show the different situations listed. Also identify the corresponding level of output and price level for each situation. An economy experiencing low levels of unemployment and some inflation – Real Output = Y1 Price Level = P1 An economy experiencing full employment – Real Output = Y2 Price Level = P2 Real Output = Y3 Price Level = P3 An economy experiencing high levels of unemployment – Based on the following extract explain what is to the real output and price level using a fully labelled Demand and Aggregate Supply curve. happening Aggregate “The UK economy has officially been in recession for the quarters. This is one of the longest and deepest the UK has suffered since World War II. Unemployment continued to rise, reaching over 2.5 million using the measure, but on the plus side inflation has been falling well within the Bank of England target rate allowing the remain at historically low levels.” last 6 recessions has ILO/LFS and is now base rate to As the economy experiences a recession AD will shift to the left as levels of consumption and investment fall. The real output will fall from Y1 to Y2, resulting in unemployment and the price level will fall from P1 to P2. Based on the following extract explain what is happening to the real output and price level using a fully labelled Aggregate Demand and Aggregate Supply curve. “The US economy is finally out of recession, reporting a steady increase in the level of consumption and investment, on the back of low interest rates and significant fiscal spending by the Government. However it is widely expected that the level of inflation will remain low despite the increase in the level of output and employment. As the economy grows and both C and I increase the level of AD will increase from AD1 to AD2. This will mean an increase in the level of employment and real output from Y1 to Y2. However the closer the economy gets to full employment the more likely prices are to rise from P1 to P2. www.a-zbusinesstraining.com