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 curve (LRAS) is represented by a vertical line in the diagram, extending from Q_f upward through points e, b, and d. This is because in the long run, the economy will return to its full-employment level of output regardless of the price level, as all factors of production (including labor) can be adjusted. Thus, the LRAS curve is vertical at the full-employment level of output.

Refer to the Diagram Given Below