← A Level Economics Revision · All Keynesian LRAS (spare capacity) questions · Home

A-Level Economics · Keynesian LRAS (spare capacity) diagram question

The economy is in a deep recession, so AD₁ crosses the Keynesian LRAS on its FLAT range. Which point is that equilibrium?

▶ Try it in the game first

The diagram

The answer

Point E. AD₁ meets the flat range at point E: output only 2, price level 2 — masses of idle labour and capital. Equilibrium is the CROSSING of AD with the AS curve: AD₁ meets the horizontal section at point E, output 2, price level 2. That flat section is what a Great Depression, 2008 or Covid-style demand collapse looks like on a diagram — huge spare capacity.

Test yourself properly

This is one of 6 questions on the keynesian lras (spare capacity) diagram — every corner lettered, every wrong answer diagnosed.

▶ Play the keynesian lras (spare capacity) game All questions & answers