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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: ____________________________________________________________________________
______________________________________________________________________________________
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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.
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