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Macroeconomic Theory (AS)

The aggregate supply (AS) function: Shape of the Keynesian long run aggregate supply curve

  • 3 things to know
  • AS Units 1 and 2

Overview

Recall questions on The shape of the Keynesian long run aggregate supply curve.

What you need to know

Answer each one before you reveal it.

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Key term

Describe the horizontal section of the Keynesian LRAS curve and explain what it represents about the economy.

Key term

At what point does the Keynesian LRAS curve become vertical, and what does this section represent?

Key term

Why does the LRAS curve become vertical at the full employment level of output?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Describe the horizontal section of the Keynesian LRAS curve and explain what it represents about the economy.

    Model answer

    The horizontal section occurs at low output levels where spare capacity exists. Firms can increase output without raising prices because unemployed resources are readily available.

  2. 2

    What characterises the upward-sloping section of the Keynesian LRAS curve?

    Model answer

    This section appears as the economy approaches full capacity. Output can still increase, but firms face rising costs as resources become scarcer, causing the price level to rise alongside output.

  3. 3

    At what point does the Keynesian LRAS curve become vertical, and what does this section represent?

    Model answer

    The vertical section occurs at the full employment level of output, representing the economy's maximum productive capacity where all factors of production are fully utilised.

  4. 4

    Why does the LRAS curve become vertical at the full employment level of output?

    Model answer

    At full employment, all factors of production are fully utilised, so real output cannot increase regardless of the price level. Higher prices cannot generate additional output when no spare resources exist.

  5. 5

    What happens to the LRAS curve when the quantity of factors of production changes?

    Model answer

    Changes in the quantity of factors of production shift the LRAS curve.

  6. 6

    How do changes in the quality of factors of production affect the LRAS curve?

    Model answer

    Changes in the quality of factors of production shift the LRAS curve.

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