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Long run aggregate supply (LRAS) - Keynesian

Syllabus: Explain, using a diagram, that the Keynesian model of the (Long Run) aggregate supply curve has three sections because of:
  • “wage/price” downward inflexibility (Sticky Wages) and
  • different levels of spare capacity in the economy.

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Essay Questions

May 2008

2. (a) “The effect of a decrease in aggregate demand on output and the price level depends on the shape of the aggregate supply curve.” Explain this statement. [10 marks]

(b) Evaluate the likely effects of a falling rate of inflation on the performance of an economy. [15 marks]