Neo Classical versus Keynesian LRAS curves and - Murphonomics新古典主义和凯恩斯主义的长期总供给曲线的曲线和murphonomics.docVIP

Neo Classical versus Keynesian LRAS curves Neo-classical and Keynesian are two different approaches/bodies of thinking to certain macroeconomic principles and government policy. This is your first introduction to differences in their opinion, and as you will see later, they differ in opinion with regards to much economic theory. Neo-classical LRAS curve The neo-classical LRAS curve is shown on the left below. Neo-classical economists believe that the LRAS curve is perfectly inelastic at the full employment level of output. They believe that the potential output of the economy is dependent on the quantity and quality of the factors of production and is independent of the price level. In the long run, neo-classical economists believe that economies will operate at the natural rate of unemployment (i.e. equilibrium unemployment). Price Level Real GDP Price Level Real GDP LRAS Price Level Real GDP LRAS Neo-classical Keynesian The Keynesian view is that even in the long-run there can be unemployment above the natural rate. Their view of the LRAS curve is shown on the right above. At low levels of output (Real GDP) the LRAS curve is horizontal or perfectly elastic. This is because with a resulting high level of unemployment and a lot of ‘spare capacity’ in the economy, output can be increased without a rise in costs as more workers can be recruited at the current wage rates and a rise in the demand for raw materials and capital will not raise their price. Then at higher levels of output the LRAS starts to slope up as firms begin to experience rises in costs as they have to compete for increasingly scarce resources (e.g. raw materials labour). The price level will rise to compensate for the higher costs. At the full employment level (maximum potential output), there is no spare capacity and the LRAS curve becomes perfectly inelastic. Long-run equilibrium output The long run equilibrium level of output is where aggregate demand is equal to the long-run agg