The figure given below depicts long run equilibrium in an aggregate demand-aggregate supply model.The change in real GDP in this figure from Y1 to Y2 could have been caused by:

A)a government policy aimed at increasing demand.
B)a change in weather conditions that led to worldwide crop failures.
C)an attempt by key resource producers to monopolize supply.
D)an increase in taxation or a decrease in government spending.
E)an increase in labor productivity.

Question

The figure given below depicts long run equilibrium in an aggregate demand-aggregate supply model.The change in real GDP in this figure from Y1 to Y2 could have been caused by:

A)a government policy aimed at increasing demand. 
B)a change in weather conditions that led to worldwide crop failures. 
C)an attempt by key resource producers to monopolize supply. 
D)an increase in taxation or a decrease in government spending. 
E)an increase in labor productivity.

Quizplus · Accepted Answer

The only factor that could cause a shift in the long run aggregate supply curve is a change in the economy's potential output, which is represented by the shift of the LRAS curve from LRAS1 to LRAS2. This can be caused by an increase in productivity, such as the one depicted by an outward shift of the production possibilities frontier. Therefore, the change in real GDP from Y1 to Y2 could only have been caused by an increase in labor productivity. None of the other options would cause a shift in the LRAS curve.

The Figure Given Below Depicts Long Run Equilibrium in an Aggregate