2.3.3 Long-run AS Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. The long-run aggregate supply (LRAS) curve is drawn as vertical because:

   • in the long run, the money supply determines the output of all firms, so changes in the money stock set each firm's output
   • in the long run, prices are fixed and output adjusts fully to demand, so supply adapts to whatever spending households choose
   • in the long run, output is determined by the economy's productive capacity, not by the price level
   • in the long run, firms produce whatever output the government orders, so output is set by public planning rather than capacity

2. Which of the following would shift the long-run AS curve to the right?

   • a rise in the cost of raw materials used in production, which raises costs and reduces the potential output the economy can sustain
   • a rise in the rate of indirect taxes on firms' sales, which lowers the output firms find profitable and reduces productive potential
   • a fall in the exchange rate of sterling, which raises the cost of imported capital goods and so reduces the capacity firms can build
   • an increase in the stock of human capital through better education and training

3. Which is the most accurate description of the Keynesian LRAS curve?

   • Horizontal at low levels of output, rising as the economy nears capacity, and vertical at full employment
   • Downward sloping, showing lower output at higher price levels, so inflation reduces the quantity of output firms supply
   • Horizontal at all levels of output, so prices never affect supply and any rise in demand is matched by an equal rise in output
   • Vertical at all levels of output, so demand has no effect on prices or on the output the economy can reach in any period

4. In the classical model, what is the effect of a permanent rise in aggregate demand?

   • Both the price level and real output fall as firms cut investment
   • The price level rises, but real output returns to its potential level
   • Real output falls permanently while the price level rises
   • Real output rises permanently while the price level is unchanged

5. A government introduces policies that increase competition in the labour market, reducing structural unemployment. What is the likely effect?

   • SRAS shifts to the left because firms face higher costs as they compete harder for workers, which raises the price of labour
   • LRAS shifts to the left because competition reduces wages, which lowers workers' income and so the amount they are willing to supply
   • LRAS shifts to the right as more labour is matched to jobs and productive potential rises
   • AD shifts to the right as households spend more on goods, because lower structural unemployment raises spending in the short run

6. Which factor shifting LRAS is linked to demographic change and migration?

   • a rise in the proportion of retired households with no earnings
   • a rise in the working-age population and the skills of migrants joining the labour force
   • a rise in the average age of the population without any change in participation
   • a fall in the number of people in full-time education

7. Which factor is most likely to shift LRAS to the left in the long run?

   • a rise in the number of graduates in science and engineering, which increases the skilled labour force available to firms
   • a permanent reduction in the number of skilled workers as a result of population ageing
   • a rise in the rate of technological progress that raises productivity and so shifts the long-run AS curve to the right
   • a fall in government regulation that reduces business costs, which encourages firms to expand capacity and raise potential

8. Changes in government regulation can shift LRAS by:

   • raising the price level directly in the short run without any change in capacity
   • reducing the money supply through reduced bank lending
   • lowering barriers to entry or red tape, which can raise productive capacity over time
   • increasing aggregate demand by raising government spending

9. Which factor would NOT directly shift the long-run AS curve?

   • a rise in the rate of consumer confidence that increases spending in the short run
   • an increase in labour productivity from better management, which lets the economy produce more output with the same inputs
   • a fall in the economy's stock of skilled workers caused by emigration, which reduces the labour input to production
   • a rise in the stock of physical capital through investment, which increases the capital workers use and raises potential output

10. Why is the long-run AS curve sometimes described as the 'natural rate' or 'full employment' level of output?

    • Because it shows the output the economy can sustain when all resources are fully and efficiently employed
    • Because it shows the maximum output possible with no restrictions on resources, so it can always be reached if demand is high
    • Because it shows the output that government sets each year as a target, so it is determined by the annual budget
    • Because it shows output at which inflation is always zero, so prices never rise at this level of production

11. Which of the following is an example of an LRAS shift caused by changes in relative productivity?

    • a fall in consumer spending on services in the short run, which reduces aggregate demand and moves the economy along AD
    • a rise in interest rates that reduces investment spending, which lowers aggregate demand and shifts AD to the left
    • a fall in the price of imported oil that lowers firms' costs, which shifts SRAS to the right but leaves LRAS unchanged
    • a rise in the productivity of an export-oriented sector relative to others across the economy

12. Which statement best evaluates the classical view of LRAS for policy-makers?

    • It implies the long-run AS curve is horizontal, so prices never change in response to shifts in aggregate demand
    • It implies demand policies cannot raise potential output, so supply-side policies are needed for sustained growth
    • It implies the price level has no effect on any aspect of the economy, so inflation is irrelevant to households in the long run
    • It implies demand policies can permanently raise potential output without limit, so governments can sustain growth by spending more

13. An economy's LRAS shifts right by 2% due to a rise in productivity. What is the most likely effect on the economy in the long run?

    • a rise in potential output and a possible fall in the price level for a given AD
    • no change in potential output, but a rise in AD
    • a fall in potential output and a rise in the price level for a given AD
    • a rise in the price level with no change in output at any time

14. Which statement about the long-run effect of a rise in AD in a Keynesian economy with spare capacity is most accurate?

    • Output cannot rise at all because LRAS is vertical at every level, so any extra demand is absorbed in higher prices from the start
    • The economy's output falls because spare capacity is removed as firms raise prices, so higher demand reduces the volume produced
    • Prices always rise by the full amount of the increase in demand, so output never changes in response to higher aggregate demand
    • Output may rise substantially with little inflation until the economy nears full employment

15. A permanent fall in the labour force participation rate, all else equal, will:

    • shift SRAS to the right only in the short run
    • increase the economy's potential output by reducing costs
    • leave potential output unchanged because demand is unaffected
    • reduce the economy's productive potential and shift LRAS to the left

16. Potential output is 1,000 billion and rises by 3% in a year because of productivity growth. What is the new potential output?

    • 1,300 billion
    • 1,003 billion
    • 970 billion
    • 1,030 billion

17. Why might government spending on infrastructure shift LRAS rather than only AD?

    • It improves transport and energy capacity, raising the economy's productive potential over time
    • It only raises consumer spending in the short run, because infrastructure is paid for once and adds no lasting capacity
    • It raises the price level without affecting any other factor, so the main effect of public projects is a rise in prices
    • It reduces the number of workers needed over time, since better transport and energy systems replace labour in most industries

18. Which of these is most likely to reduce the natural rate of unemployment and so shift LRAS right?

    • a fall in training spending by employers on their existing workforce
    • a rise in unemployment benefit that lengthens the time spent searching for work
    • more flexible labour markets and better matching of workers' skills to available jobs
    • a rise in the minimum wage above the productivity of low-skilled workers

19. Which measure is most relevant for judging whether an economy is operating at its potential output?

    • the current account balance of the balance of payments
    • the rate of change of the consumer prices index
    • the output gap, comparing actual output with estimated potential output
    • the claimant count of people receiving unemployment benefit

20. Which best explains why the long-run AS curve may shift left after a banking crisis?

    • damaged investment and lower capital accumulation reduce the economy's productive potential over time
    • a fall in the price level increases the demand for money held by banks, which reduces funds available for lending
    • banks lend more during a crisis, which permanently boosts potential output because firms invest in new capacity at no cost
    • higher interest rates always raise the productive capacity of banks, so the financial sector expands and potential rises

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