Keynesian LRAS

The Keynesian model of LRAS is an alternative model of the standard LRAS curve.

• As AD shifts to the right the economy grows and unemployment falls.
• LRAS is elastic up until the curve. This is because of spare capacity in the economy.
• As AD reaches the curve, this then leads to a rise in price level - No spare capacity so firms are having to compete for labour.
• The price level rises from this point onwards as the labour market begins to tighten

Tightening of the labour market

• Small pool of labour remaining with skills, so firms increase ways to attract them to work for them.
• This drives up inflation