Long Run Aggregate Supply Curve Flashcards, test questions and answers

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What is Long Run Aggregate Supply Curve?

The Long-Run Aggregate Supply Curve (LRAS) is an economic concept that shows the maximum amount of goods and services that can be supplied in an economy at a given price level in the long run. In other words, it represents the potential productive capacity of an economy over a period of time. The LRAS curve is upward sloping and starts from the origin but does not necessarily go through any point on the horizontal axis. This is because it reflects changes in production due to changes in factors such as technology, capital, labor, and natural resources. As these factors increase or decrease, so too will their contribution to aggregate supply at all price levels. When analyzing the LRAS curve we must consider two main components: potential output (Y*) and its associated price level (P*). The potential output is determined by how much of each factor is available within an economy while the associated price level reflects how much producers are able to charge for their products given prevailing market conditions. In terms of economic growth and stability, it’s important for governments to keep both the potential output and its associated prices relatively steady over time so as not to disrupt businesses’ ability to plan ahead. If there are large fluctuations in either component then this could have serious implications for future investments and business decisions leading to reduced economic growth or instability. The LRAS curve can also provide insight into inflationary pressures within an economy which arise when aggregate demand exceeds aggregate supply leading to increased prices across all goods and services produced within an economy. It’s important for governments to understand where their economies stand on this curve so as to be able to effectively manage inflationary pressures when they arise or even prevent them from occurring in the first place if possible through fiscal policies such as government spending or taxation initiatives.