In an aggregate supply and aggregate demand diagram, the long-run aggregate supply curve is represented by
A) a downward sloping line relating prices and output.
B) an upward sloping line relating prices and output.
C) a horizontal line at the current level of price.
D) a vertical line at full employment.

Question

Quizplus · Accepted Answer

The long-run aggregate supply curve is vertical (i.e., a vertical line) at the full employment level of output, indicating that in the long run, the economy produces at its potential output level regardless of the price level. This is because in the long run, all factors of production (e.g., labor, capital, technology) are assumed to be fully utilized, and any increase in the price level that raises the output level in the short run will eventually be offset by adjustments in wages and other input prices, leading to no change in output in the long run. Choices A, B, and C are incorrect because they represent the short-run aggregate supply curve, which relates prices and output when some factors of production are not fully utilized.

In an Aggregate Supply and Aggregate Demand Diagram, the Long-Run