At a recent board meeting of Pembroke Financial Inc., members of the board were discussing recent fiscal and monetary policy changes in the U.S. It became a heated discussion when each member expressed their opinions on what will be happening to long-run aggregate supply (LAS), aggregate demand, and the overall economy as a result of policy shifts. Joe Frankel and Martin Bentz, two vocal members of the board, made the following statements during the meeting:
Frankel: LAS can be thought of as the potential GDP of the economy. Potential GDP is positively related to the quantity of labor in the economy and the technology level of the economy, but is inversely related to the quantity of capital in the economy. So, potential GDP will rise if the quantity of labor increases, the level of technology increases, or the quantity of capital decreases.
Bentz: The level of real output on the LAS curve is the economy’s level of production when it is operating at zero unemployment. A zero unemployment rate is referred to as full employment.
With respect to these statements:
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A) |
only Bentz is incorrect. | |
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B) |
only Frankel is incorrect. | |
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LAS can be thought of as the potential real output of the economy. The potential real output of an economy is positively related to: the quantity of labor in the economy; the quantity of capital (productive resources) in the economy, and the technology that the economy possesses.
The level of real output (real GDP) on the LAS curve is the economy’s level of production when the economy is operating at full employment. However, full employment does not mean zero unemployment. There will always be some unemployment. Therefore, there is a natural rate of unemployment corresponding to the level of real GDP along the LAS curve, and that level is referred to as full employment GDP.
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发表于 2011-3-9 11:37
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