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Transcript
66. Classical Long-run Aggregate Supply 1. Missing words What is meant by the Long-run? ____________________________________ The Classical LRAS allows economists to illustrate a number of different scenarios that might face an economy. It assumes that the economy is always at ________________________. This is because Classical economists assume that those not in work choose to not work and are therefore ___________________. 2. Graphical Analysis 2.1 On the following diagram draw a Classical Long Run Aggregate Supply curve and then add an Aggregate Demand curve for each of the situations listed. Identify the corresponding level of output and price level for each situation. 2.2 An economy using expansionary fiscal policy – Real Output = ________ Price Level = _________ 2.3 An economy using deflationary monetary policy – Real Output = _________ Price Level = __________ 2.4 An economy using supply side policies – Real Output = ________ Price Level = _______ 3. More Graphical Analysis Use the following diagram to answer the questions below. 1. An economy is operating at AD1. If it experiences an appreciation of its currency, where will AD move to? ________________ Explain why: _______________________________ _________________________________________ _________________________________________ 2. An economy is operating at AD1. Which of the following policies is likely to cause AD to shift to AD3? a) A cut in interest rates b) A cut in taxation c) An increase in spending on education and training d) A cut in government spending Explain why _______________________________ _________________________________________ 3. Which of the following is likely to cause the Aggregate Demand curve to shift from AD 1 to AD2? a) An increase in the level of income tax b) An increase in labour mobility c) An increase in the domestic inflation rate d) An increase in the inflation rate of a main export partner. Explain why: ____________________________________________________________________________ ______________________________________________________________________________________ www.a-zbusinesstraining.com 66. ANSWERS: Classical Long-run Aggregate Supply What is meant by the Long-run? All factors of production are variable The Classical LRAS allows economists to illustrate a number of different scenarios that might face an economy. It assumes that the economy is always at Full Employment. This is because Classical economists assume that those not in work choose to not work and are therefore Voluntary Unemployed. On the following diagram draw both a Classical Long Run Aggregate Supply curve and Aggregate Demand curves to show the different situations listed. Also identify the corresponding level of output and price level for each situation. An economy using expansionary fiscal policy – Real Output = Y FE Price Level = PL3 An economy using deflationary monetary policy – Real Output = Y FE Price Level = PL5 An economy using supply side policies – Real Output = Y FE2 Price Level = PL4 Use the following diagram to answer the questions below. 1. An economy is operating at AD1. If it experiences an appreciation of its currency, AD will move to? AD3 Explain why The appreciation of the currency means that exports are less competitive and imports more competitive therefore exports fall and imports rise and AD shifts to the left. 2. An economy is operating at AD1. Which of the following policies is likely to cause AD to shift to AD3? a) A cut in interest rates b) A cut in taxation c) An increase in spending on education and training d) A cut in government spending Explain why Government spending is a component of AD. If G falls then the AD falls and shifts to the left to AD3. 3. d) An increase in the inflation rate of a main export partner. Explain why: As the inflation rate of a country that we do a significant amount of trade with increases then our exports to them become more price competitive and therefore we can increase our exports and see a shift in the AD curve to the right. www.a-zbusinesstraining.com