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WHAT?: One of three basic questions of allocation (the other two are How? and For Whom?). Answering the 'What?' question of allocation determines the types and quantities of goods and services produced with society's limited resources. Should society produce hammocks or hot fudge sundaes? Computers or Cadillacs? Birdfeed or battleships? The production possibilities analysis sets the stage for answering the 'What?' question.

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Lesson 14: Aggregate Supply | Unit 3: The Curves Page: 8 of 20

Topic: Long Run <=PAGE BACK | PAGE NEXT=>

The long-run aggregate supply (LRAS) curve captures the relationship between the price level and the aggregate supply of real production in the long run.
  • GDP deflator, the price level, is measured on the vertical axis. Real GDP, the real production, is measured on the horizontal axis.
Highlights:
  • The LRAS is a straight, vertical line.
  • The price level does not affect the aggregate supply of real production.
  • The supply is real production given that all resources are fully employed.
  • Flexible prices ensures that full employment production is maintained, in the long run.

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ASSUMPTIONS, KEYNESIAN ECONOMICS

The macroeconomic study of Keynesian economics relies on three key assumptions--rigid prices, effective demand, and savings-investment determinants. First, rigid or inflexible prices prevent some markets from achieving equilibrium in the short run. Second, effective demand means that consumption expenditures are based on actual income, not full employment or equilibrium income. Lastly, important savings and investment determinants include income, expectations, and other influences beyond the interest rate. These three assumptions imply that the economy can achieve a short-run equilibrium at less than full-employment production.

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Today, you are likely to spend a great deal of time watching the shopping channel looking to buy either a flower arrangement for your aunt or a birthday greeting card for your uncle. Be on the lookout for door-to-door salesmen.
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North Carolina supplied all the domestic gold coined for currency by the U.S. Mint in Philadelphia until 1828.
"When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left, and could say, I used everything you gave me."

-- Erma Bombeck, writer

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