Long-run aggregate supply

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   Aggregate Demand      capacity      demand-pull      elastic      governments      inelastic      monetarist      potential      production      scarce      supply-side      three   
There are two major views relating to the shape of the LRAS. The different beliefs about the shape of the LRAS curve lie at the basis of controversies about appropriate policies to be followed by .
The new-classical view ( or free market view)
These economists argue that the LRAS curve does not respond to changes in in the long run and is determined completely independently of demand. Its position depends upon the quantity and productivity (quality) of factors of . An expansion of AD will always lead to inflation and will not, in the long run, lead to growth in output and thus employment. So new-classical economists argue that national output may only be increased by adopting policies to shift the LRAS to the right.
The Keynesian view (interventionist view)
The shape of the curve that is known as the Keynesian LRAS shows possible phases. In region 1, the LRAS is perfectly . Producers in the economy can raise their level of output without higher average costs, because of ‘spare ’ in the economy.
In region 2, as the economy approaches its output (Yf), and the spare capacity is used up, the available factors in the economy become more . As producers increase output, they bid for the increasingly scarce factors and prices begin to rise.
In region 3, when the economy is at full capacity, all factors are being used and so output cannot increase. Thus, LRAS is perfectly .