The long-run aggregate supply curve is vertical at the level of real output that corresponds to the natural rate of employment.

Question

Quizplus · Accepted Answer

The long-run aggregate supply curve is vertical at the level of real output that corresponds to the natural rate of unemployment, not employment. This is because in the long run, all economic factors are able to adjust fully, including wages and prices, resulting in firms producing at their maximum potential. The natural rate of unemployment is the rate at which there is no cyclical unemployment and only frictional and structural unemployment remains, and this is the level of employment that corresponds to the vertical long-run aggregate supply curve.

The Long-Run Aggregate Supply Curve Is Vertical at the Level