Refer to the above diagram.Assume that nominal wages initially are set on the basis of the price level P₂ and that the economy initially is operating at its full-employment level of output Q_f.In terms of this diagram, the long-run aggregate supply curve: A)is AS₂. B)is a vertical line extending from Q_f upward through e, b, and d. C)may be either AS₁, AS₂, or AS₃ depending on whether the price level is P₁, P₂, or P₃. D)is a horizontal line extending from P₂ rightward through f, b, and g.

Question

Quizplus · Accepted Answer

In the long run, the economy will adjust and the aggregate supply curve will become vertical at the potential output level (Q_f). This is because in the long run, changes in the price level will not affect the level of output, but only the price level itself. This is represented by a vertical line extending from Q_f upward through e, b, and d.

Refer to the Above Diagram