Long-Run Economic Growth – Keynesian AS Model
This diagram shows long-run economic growth using the Keynesian AS model, where potential output expands as LRAS shifts rightward.
ad
AD: Aggregate demand, assumed constant in this diagram.
lras1
LRAS1: Original long-run aggregate supply at potential output Y1.
lras2
LRAS2: New LRAS showing increased capacity at output Y2.
pl1
PL1: Initial price level before supply-side improvements.
pl2
PL2: Lower price level after LRAS shifts outward.
y1
Y1: Original level of real GDP.
y2
Y2: Higher level of real GDP following growth in potential output.
In the Keynesian AS model, the aggregate supply curve is upward sloping and becomes vertical at full employment output.
The initial equilibrium is at Y1 and PL1, where AD intersects LRAS1.
An outward shift from LRAS1 to LRAS2 represents an increase in the economy's productive capacity due to improvements in factors of production such as human capital, infrastructure, or technology.
This shift increases real output from Y1 to Y2 and reduces inflationary pressure, shown by a fall in the price level from PL1 to PL2.
This model is useful for showing how supply-side policies can lead to sustainable, non-inflationary economic growth over time.
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