Long-Run Aggregate Supply (LRAS)

Concepts

  • Maximum Capacity of an Economy
    • Infrastructure
  • Full-Employment Output (RGDP)
  • Potential Gross Domestic Product
  • Natural Rate of Unemployment (NRU)
  • Long-Run Equilibrium
    • Recessionary Gap
    • Inflationary Gap

Overview

The Long-Run Aggregate Supply Curve (LRAS) is a vertical line on the aggregate model.  It basically represents the long-run maximum capacity of an economy. If an economy were to utilize all of its resources and all of its infrastructure as efficiently as possible it would be operating on the LRAS.  The LRAS is vertical at a very important level of output (or RGDP). Usually, it’s called Full-Employment Output (or RGDP), but sometimes you’ll see it referred to as Potential Output (or RGDP).  If an economy is fortunate enough to reach full-employment this also means it has reached the Natural Rate of Unemployment (NRU).  The NRU represents the level of unemployment that exists when an economy is fully-employed (usually between 3-5%).  Finally, we’ll discuss what it looks like when we reach a long-run equilibrium.  If an economy falls short of this goal it experiences a recessionary gap in RGDP.  If an economy exceeds this goal it experiences an inflationary gap in RGDP.

Materials

Lecture

Video Coming at Later Date

Quiz

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