We shall examine the derivation of LRAS and then see what factors shift the curve. If the economy is growing at a particular percentage rate, and if the levels shown represent successive years, then the size of the increases will become larger and larger, as indicated in the figure.īecause economic growth can be considered as a process in which the long-run aggregate supply curve shifts to the right, and because output tends to remain close to this curve, it is important to gain a deeper understanding of what determines long-run aggregate supply ( LRAS). The figure shows a succession of increases in potential to Y 2, then Y 3, and Y 4. If the economy begins at potential output of Y 1, growth increases this potential. Notice that with exponential growth, each successive shift in LRAS is larger and larger.įigure 8.4 “Economic Growth and the Long-Run Aggregate Supply Curve” illustrates the process of economic growth. Figure 8.4 Economic Growth and the Long-Run Aggregate Supply Curveīecause economic growth is the process through which the economy’s potential output is increased, we can depict it as a series of rightward shifts in the long-run aggregate supply curve.
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