Download 65 Keynesian LRAS Ed

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.
____________________________________________
____________________________________________
____________________________________________
___________________________________________
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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.
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