Refer to the diagram given below. Assume that the nominal wages of workers in an economy are initially set on the basis of the price level P₂ and that the economy initially is operating at the full-employment level of output Q_f.In the diagram, the long-run aggregate supply curve: A)is represented by AS₂. B)is a vertical line extending from Q_f upward through the points 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 points f, b, and g.

Question

Quizplus · Accepted Answer

The long-run aggregate supply (LRAS) curve represents the potential output of an economy when all resources are fully utilized. It is not affected by changes in the price level, as all prices adjust to the level of potential output in the long run. Therefore, the LRAS curve is a vertical line at the level of potential output (Q_f) in the diagram. This curve passes through points e, b, and d, which represent the potential output at different price levels.

Refer to the Diagram Given Below