economic theory question regarding LRAS,SRAS,AD

Discussion in 'Economics' started by TGpop, Apr 18, 2011.

  1. TGpop


    I'm studying for exams, this is regarding the keynesian view of the LRAS curve, i.e. that it is intially elastic then becomes more inleastic as the economy gets closer to its PPB.

    I understand that when the economy is at the vertical section, an increase in AD causes a positive output gap, overfull employment, therefore resulting in costs of labour etc being bidded up, resulting in a decrease in SRAS causing inflation.

    My question is, in the half elastic/half inelastic part of the keynesian LRAS curve, does this same scenario occur? Obviously there is not a positive output gap, but if AD rises and causes a movement along the SRAS curve and therefore increases output, firms demand more factors, increasing their costs and shifting the SRAS curve to the left/upward to cause inflation ,although not as great as in the vertical section as there is more spare factors, is this correct?