1. LRAS & Full Potential Output
Shifting LRAS Curve

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

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

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

5. Recent History: The 1980’s & 1990’s
Technology Breakthroughs occur in USA Economy
AD/AS Model
PPF Graph
LRAS1
Price
Level
Real
GDP
AD1
SRAS1 P1
LRAS2
SRAS2 E1 Y2 E2 P2 Y1
Technological innovation led to
a strong economy & low inflation
during the 1980’s & 1990’s

6. Inflationary Gap Recessionary Gap Economy above full output
Economy below full output
LRAS1
Price
Level
Real
GDP
SRAS1
LRAS1
Price
Level
Real
GDP
SRAS1
AD1
AD1 P1 Y1 E1 P1 Y1 E1 Y* Y*
Unemployment high, real output low
Below PPF
Unemployment very low, output high
Above PPF,

7. Worksheet