Consider the basic AD/AS diagram.The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps.
A)demanded by households after all factor prices
B)supplied by firms after all factor prices
C)demanded by households before all factor prices
D)supplied by firms before all factor prices
E)supplied by firms after all output prices

Question

Quizplus · Accepted Answer

The vertical line at Y* represents the potential output level of the economy, which is the amount of output supplied by firms after all factor prices have adjusted. This potential output level is also known as the natural level of output or the full employment level of output. Therefore, the correct choice is B, which states that the vertical line at Y* shows the relationship between the price level and the amount of output supplied by firms after all factor prices.

Consider the Basic AD/AS Diagram