LRAS Full Potential Output Shifting LRAS Curve What

LRAS & Full Potential Output Shifting LRAS Curve

What determines a country’s full potential? • Amount of resources • Level of human capital • Technology, labor force, entrepreneurship, etc…. PPF of USA

Long Run AS (LRAS) • LRAS represents the full potential output of an economy – Economy is at full employment – On PPF curve – At full efficiency

Shift to the right in LRAS LABOR CAPITAL Increase in Labor Force NATURAL RESOURCES TECHNOLOGY Discovery of new resources Depletion of old resources Change in Natural Rate of Unemployment Any Shift in Capital Stock Physical capital or Human capital New Technology More Free Trade

Recent History: The 1980’s & 1990’s Technology Breakthroughs occur in USA Economy AD/AS Model Price Level PPF Graph LRAS 1 LRAS 2 SRAS 1 SRAS 2 P 1 --------- E 1 P 2 ------------ E 2 Y 1 Y 2 AD 1 Real GDP Technological innovation led to a strong economy & low inflation during the 1980’s & 1990’s

Recessionary Gap Inflationary Gap Economy below full output Economy above full output LRAS 1 Price Level SRAS 1 Price Level ------ E 1 ----- P 1 Y 1 AD 1 Y* Real GDP Unemployment high, real output low Below PPF --------- P 1 LRAS 1 1 Y* Y SRAS 1 E 1 AD 1 Real GDP Unemployment very low, output high Above PPF,

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